A Lagrange multiplier test for causality in variance

Abstract

We adapt the Lagrange multiplier (LM) principle to test for noncausality in variance of financial returns. The new test is compared with a Portmanteau statistic [Cheung, Y.W., Ng, L.K., 1996. A causality in variance test and its application to financial market prices. Journal of Econometrics 72, 33-48.]. A Monte Carlo study reveals superior power of the LM test. © 2006 Elsevier B.V. All rights reserved.