AUTOMATIC INFERENCE OF THE CONTEMPORANEOUS CAUSAL ORDER OF A SYSTEM OF EQUATIONS

David Hendry and Hans-Martin Krolzig have demonstrated that PCGets, an automatic model selection algorithm that implements general-to-specific search procedures, can be successfully applied to the individual equations of vector autoregressions (VARs), provided that the contemporaneous causal order is known so that the covariance matrix of the VAR is diagonal. Graph-theoretic causal-search algorithms provide a means of determining the contemporaneous causal order of a VAR needed before general-to-specific search procedures can be applied. This paper explains the basis for those algorithms with special reference to VARs.

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