As an illustration let us assume that we are working with a bivariate model

(j=2), and further assume that x1 and x2 are I(1), so dmax=1, and satisfying a

VAR(k=1). 11 The next step is to estimate the augmented model (p=k+dmax) via

Ordinary Least Squares (OLS) as in Dolado and Lütkepohl (1996), that is VAR(2):

𝑋1𝑡 𝑎10 𝑎 (1) 𝑎12 (1) 𝑋 𝑎 (2) 𝑎12 (2) 𝑋 𝑒1𝑡

[ ] = [𝑎 ] + [ 11 ] ∗ [ 1𝑡−1 ] + [ 11 ] ∗ [ 1𝑡−2 ] + [𝑒 ] (3.27)
𝑋2𝑡 20 𝑎21 (1) 𝑎22 (1) 𝑋2𝑡−1 𝑎21 (2) 𝑎22 (2) 𝑋2𝑡−2 2𝑡

𝑒1𝑡
Where the expected value of the error is 𝐸(𝑒𝑡 ) = [𝑒 ] = 0 and 𝐸(𝑒𝑡 𝑒𝑡 ′ ) = Σ.
2𝑡

Testing the parameter restriction 𝑎12 (1) = 0, is testing that x2 does not Granger cause

x1 by computing the Wald test from the model estimates.

Let us expand the bivariate example above to the case of testing Granger non-

causality of volatility on exports. 12 Let xt be the vector that contains the five

variables (j=5) in the model 3.28 where x1t=exports, x2t=WGDPt, x3t=ExRUSDt,

x4t=VolEUR/USDt, x5t=VolJPY/USDt, satisfying a VAR(5) process and dmax=1, p=6.

𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−1 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−2 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−3

WGDP𝑡 WGDP𝑡−1 WGDP𝑡−2 WGDP𝑡−3
ExRUSD𝑡 ExRUSD𝑡−1 ExRUSD𝑡−2 ExRUSD𝑡−3
𝑉𝑂𝐿𝐄𝐔𝐑 = 𝐴0 + 𝐴1 𝑉𝑂𝐿𝐄𝐔𝐑 + 𝐴2 𝑉𝑂𝐿𝐄𝐔𝐑 + 𝐴3 𝑉𝑂𝐿𝐄𝐔𝐑 +
𝐔𝐒𝐃 𝑡 𝐔𝐒𝐃 𝑡−1 𝐔𝐒𝐃 𝑡−2 𝐔𝐒𝐃 𝑡−3
𝑉𝑂𝐿 𝐉𝐏𝐘 𝑉𝑂𝐿 𝐉𝐏𝐘 𝑉𝑂𝐿 𝐉𝐏𝐘 𝑉𝑂𝐿 𝐉𝐏𝐘
𝐔𝐒𝐃 𝑡 [ 𝐔𝐒𝐃 𝑡−1 ] [ 𝐔𝐒𝐃 𝑡−2 ] [ 𝐔𝐒𝐃 𝑡−3 ]

𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−4 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−5 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−6

WGDP𝑡−4 WGDP𝑡−5 WGDP𝑡−6 ε1𝑡 (3.28)
ε2𝑡
ExRUSD𝑡−4 ExRUSD𝑡−5 ExRUSD𝑡−6
𝐴4 𝑉𝑂𝐿𝐄𝐔𝐑 + 𝐴5 𝑉𝑂𝐿𝐄𝐔𝐑 + 𝐴6 𝑉𝑂𝐿𝐄𝐔𝐑 + ε3𝑡 ,
𝐔𝐒𝐃 𝑡−4 𝐔𝐒𝐃 𝑡−5 𝐔𝐒𝐃 𝑡−6 ε4𝑡
𝑉𝑂𝐿 𝐉𝐏𝐘 𝑉𝑂𝐿 𝐉𝐏𝐘 𝑉𝑂𝐿 𝐉𝐏𝐘 [ ε5𝑡 ]
[ 𝐔𝐒𝐃 𝑡−4 ] [ 𝐔𝐒𝐃 𝑡−5 ] [ 𝐔𝐒𝐃 𝑡−6 ]

t=p+1,...,T

11
See Rambaldi and Doran (1996)
12
We adapt Rambaldi and Doran (1996) example to our case.

37