On Rejecting Causal Relationships with Observational Data

David A. Bessler

Texas A&M University

Abstract

  We investigate the use of causal inference methods for testing a specific hypothesized causal relation: Ho: A causes B. We demonstrate the use of an instrument C can be helpful in rejecting the hypothesis using notions developed from the machine learning inference algorithms. Our main finding is that these algorithms allow researchers to qualify hypothesis rejections as either weak basis rejections or strong basis rejections. Weak basis rejections of the hypothesis follow from failure to reject the sharp hypothesis r(A,B) = 0. Strong basis rejections follow from rejection of the hypothesis r(A,B) = 0, r(A,C) = 0, and failure to reject r(B,C)=0. Strong basis rejections are more reliable, reflecting more strenuous testing conditions.

  This presentation is based on joint work with Henry Bryant and Michael Haigh which is offered in the unpublished paper: Bryant, H., D. Bessler and M. Haigh, “Disproving Causal Relationships Using Observational Data,” Texas A&M University , December 2005.

Linkages among Equity Markets Using Basket Currencies and Directed Acyclic Graphs

David A. Bessler

Texas A&M University

Abstract

  This paper compares the stability of interrelationships among nine national equity markets by employing basket currencies versus individual base currencies to measure rates of return. We show that the average correlations of equity indexes based on basket currencies are much lower than the average correlations of equity indexes based on individual home base currencies. Additionally, empirical directed graph results using basket currencies are more consistent with each other than the results found using a single base currency – no matter which individual currency is selected as the base. We conclude that basket currencies provide more robust results for studying equity market co-movements than individual base currencies. By implication, studies on equity market interrelationships, including studies on potential financial contagion between equity markets, should use basket currencies to avoid currency dependent results.

  This presentation is based on joint work with James Kolari and Thein Maung which is offered in the unpublished paper: Bessler, D.A., J. W. Kolari, and T. A. Maung “Dynamic Linkages Among Equity Markets Using Basket Currencies and Directed Acyclic Graphs” Texas A&M University , December 2005.