Physical Sciences and Mathematics Commons^™

The Distortional Effects Of Temporal Aggregation On Granger Causality, Gulasekaran Rajaguru, Tilak Abeysinghe

Gulasekaran Rajaguru

Economists often have to use temporally aggregated data in causality tests. A number of theoretical studies have pointed out that temporal aggregation has distorting effects on causal inference. This paper provides a quantitative assessment of the magnitude of the distortions created by temporal aggregation by plugging in theoretical cross covariances into the limiting values of least squares estimates. Some Monte Carlo results and an application are provided to assess the impact in small samples. It is observed that in general the most distorting causal inferences are likely at low levels of temporal aggregation. At high levels of aggregation, causal information …