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Spurious Regressions of Stationary AR(p) Processes with Structural Breaks

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  • Chu Ba

    (Carleton University)

  • Kozhan Roman

    (University of Warwick)

Abstract

When a pair of independent series is highly persistent, there is a spurious regression bias in a regression between these series, closely related to the classic studies of Granger and Newbold (1974). Although this is well known to occur with independent I(1) processes, this paper provides theoretical and numerical evidence that the phenomenon of spurious regression also arises in regressions between stationary AR(p) processes with structural breaks, which occur at different points in time, in the means and the trends. The intuition behind this is that structural breaks can increase the persistence levels in the processes (e.g., Granger and Hyung (2004)), which then leads to spurious regressions. These phenomena occur for general distributions and serial dependence of the innovation terms.

Suggested Citation

  • Chu Ba & Kozhan Roman, 2010. "Spurious Regressions of Stationary AR(p) Processes with Structural Breaks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(1), pages 1-25, December.
    • Handle: RePEc:bpj:sndecm:v:15:y:2010:i:1:n:1
    DOI: 10.2202/1558-3708.1781
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    References listed on IDEAS

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    1. Clive Granger & Namwon Hyung & Yongil Jeon, 2001. "Spurious regressions with stationary series," Applied Economics, Taylor & Francis Journals, vol. 33(7), pages 899-904.
    2. Wayne E. Ferson & Sergei Sarkissian & Timothy T. Simin, 2003. "Spurious Regressions in Financial Economics?," Journal of Finance, American Finance Association, vol. 58(4), pages 1393-1413, August.
    3. Tsay, Wen-Jen, 1999. "Spurious Regression Between I(1) Processes With Infinite Variance Errors," Econometric Theory, Cambridge University Press, vol. 15(4), pages 622-628, August.
    4. Peter C. B. Phillips, 1998. "New Tools for Understanding Spurious Regressions," Econometrica, Econometric Society, vol. 66(6), pages 1299-1326, November.
    5. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
    6. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    7. Wayne E. Ferson & Sergei Sarkissian & Timothy T. Simin, 2003. "Spurious Regressions in Financial Economics?," Journal of Finance, American Finance Association, vol. 58(4), pages 1393-1414, August.
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    Cited by:

    1. Gerdie Everaert & Hauke Vierke, 2016. "Demographics and Business Cycle Volatility: A Spurious Relationship?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1467-1477, November.

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