Causality-in-variance tests suffer from severe size distortions in the presence of structural breaks in volatility, when such breaks are not taken into account. Pre-testing the series for structural changes in volatility largely remedies the problem.

, ,
Economics Letters
Erasmus Research Institute of Management

van Dijk, D., Osborn, D., & Sensier, M. (2005). Testing for causality in variance in the presence of breaks. Economics Letters, 89(2), 193–199. doi:10.1016/j.econlet.2005.05.029