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Spurious Regressions in Financial Economics?

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Author Info
Wayne E. Ferson (The Carroll School of Management, Boston College and National Bureau of Economic Research)
Sergei Sarkissian (The Faculty of Management, McGill University)
Timothy T. Simin (The Smeal College of Business, Pennsylvania State University)

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Abstract

Even though stock returns are not highly autocorrelated, there is a spurious regression bias in predictive regressions for stock returns related to the classic studies of Yule (1926) and Granger and Newbold (1974). Data mining for predictor variables interacts with spurious regression bias. The two effects reinforce each other, because more highly persistent series are more likely to be found significant in the search for predictor variables. Our simulations suggest that many of the regressions in the literature, based on individual predictor variables, may be spurious. Copyright (c) 2003 by the American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 4 (08)
Pages: 1393-1414
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:4:p:1393-1414

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