Testing for the Granger-causality between returns in the U.S. and GIPSI stock markets

Abstract

This paper studies the Granger-causality between the U.S. stock market and five stock markets in so-called ‘debtor countries’ of the European Union: Greece, Ireland, Portugal, Spain and Italy (GIPSI). We consider four novel methods in the study: (i) General Entropy-based Method, (ii) First-order Approximation of Likelihood Ratios (LR), (iii) Basic Skewness-based Method for Skewed Variables, and (iv) New Skewness-based Method, which corrects for skewness. The results show evidence of nonlinear causality Granger from the U.S to the Greek and Spanish stock markets. In addition, a significant causality amongst GIPSI stock markets is observed. Finally, the collapse of Lehman brothers impacts the causalities among stock markets. These results have important implications for international diversification and portfolio risk management.