Finance Research Seminar: “Testing for the Validity of W in GVAR models” by Bertrand CANDELON – Université Catholique de Louvain

Speaker: Bertrand CANDELON

Université Catholique de Louvain

Date and Location – Thursday January 28th 2021 from 12:30 to 14:00 on Zoom


Global VARs are one of the mot established econometric frameworks to analyse cross-country/markets interconnections. Nevertheless, they are based on pre-specified channels of interdependence (proxied by the matrix of distance W) that are never empirically tested. This paper develops a simple Likelihood Ratio Test for the validity of the proposed channels, assesses its asymptotic size and power, and proposes a bootstrapped alternative to avoid finite sample distortions. In the empirical application regarding euro area sovereign bond yields modelling, the most popular channels get rejected. The nonrejected W oulines the importance of contagion and flight-to-quality mechanisms even before the sovereign debt crisis.

Keywords: Global VAR, Structural VAR, Likelihood Ratio Test, Interdependence
JEL Classification: C12, C32, C52, E43, H63

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