Journal of Data Science

Abstract: This paper studies an effective stepwise hypotheses testing pro cedure in identifying dynamic relations between time series, and its close connection with popular information criteria such as AIC and BIC. This procedure, labeled M2, extends Chen and Lee’s (1990) procedure to cover both the strong and weak form dynamic relations; and to be used with a guided choice of significance levels which are adapting in nature. Intu itively, procedure M2 can be viewed as a backward-elimination approach that simplifies the all-possible pairwise comparisons approach implied by information criterion. New insights concerning identification of strong and weak form dynamic relations using these approaches are given. Extensive simulation experiments are conducted to illustrate the performance of the IC and M2 approach in different settings. For applications, we study the dynamic relations between price level and interest rate in US and UK, and the robustness of the model identified is also addressed.