In order to examine the out of
sample causality we use variance
decomposition analysis which partitions the variance of the forecast error of a
certain variable into proportions attribut
able to shocks in each variable in the
system. Variance decomposition analysis present a factual breakup of the change
in the value of the variable in a particul
ar period resulting from changes in the same
variable in addition to other variables
in preceding periods. The impulse response
analysis investigates the influence of random
shock in a variable on other variables
of interest. Impulse responses of returns in various markets to a shock in oil
innovations are also examined. Impulse responses show the effect of shocks for
different days separately whereas varian
ce decomposition analysis exhibits the
cumulative effect of shocks.