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The "spurious regression problem" in the classical regression model framework

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  • Gueorgui I. Kolev

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    (EDHEC Business School)

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    Abstract

    I analyse the "spurious regression problem" from the Classical Regression Model (CRM) point of view. Simulations show that the autocorrelation corrections suggested by the CRM, e.g., feasible generalised least squares, solve the problem. Estimators are unbiased, consistent, efficient and deliver correctly sized tests. Conversely, first differencing the data results in inefficiencies when the autoregressive parameter in the error process is less than one. I offer practical recommendations for handling cases suspected to be in the "spurious regression" class.

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    File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I1-P88.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 31 (2011)
    Issue (Month): 1 ()
    Pages: 925-937

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    Handle: RePEc:ebl:ecbull:eb-10-00191

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    Related research

    Keywords: spurious regression; classical regression model; generalised least squares; autocorrelation corrections;

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    1. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 757, Cowles Foundation for Research in Economics, Yale University.
    2. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 979, Cowles Foundation for Research in Economics, Yale University.
    3. Sun, Yixiao, 2003. "A Convergent t-statistic in Spurious Regressions," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt150457tv, Department of Economics, UC San Diego.
    4. Wooldridge, Jeffrey M., 1991. "On the application of robust, regression- based diagnostics to models of conditional means and conditional variances," Journal of Econometrics, Elsevier, Elsevier, vol. 47(1), pages 5-46, January.
    5. McCallum, Bennett T., 2010. "Is the spurious regression problem spurious?," Economics Letters, Elsevier, Elsevier, vol. 107(3), pages 321-323, June.
    6. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 2(2), pages 111-120, July.
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