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Stationarity of time series and the problem of spurious regression

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  • Baumöhl, Eduard
  • Lyócsa, Štefan

Abstract

The goal of this paper was to introduce some general issues of non-stationarity for practitioners, students and beginning researchers. Using elementary techniques we examined the effect of non-stationary data on the results of regression analysis. We further shoved the effect of larger sample sizes on the spuriousness of regressions and we also examined the well known “rule of thumb” of how to identify spurious regressions. We also demonstrated the problem of spurious regression on a practical example, using closing prices of stock market indices from CEE markets.

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File URL: http://mpra.ub.uni-muenchen.de/27926/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27926.

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Date of creation: 30 Sep 2009
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Handle: RePEc:pra:mprapa:27926

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Related research

Keywords: stationarity; time series data; various unit root tests; spurious regression; the R-squared and the Durbin – Watson statistics “rule of thumb”; CEE stock markets;

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References

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  1. Hylleberg, S. & Engle, R.F. & Granger, C.W.J. & Yoo, B.S., 1988. "Seasonal, Integration And Cointegration," Papers 6-88-2, Pennsylvania State - Department of Economics.
  2. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  3. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  4. Dickey, David A & Pantula, Sastry G, 1987. "Determining the Ordering of Differencing in Autoregressive Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 455-61, October.
  5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  6. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
  7. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January.
  8. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
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Cited by:
  1. Lyócsa, Štefan & Výrost, Tomáš & Baumöhl, Eduard, 2011. "Unit-root and stationarity testing with empirical application on industrial production of CEE-4 countries," MPRA Paper 29648, University Library of Munich, Germany.

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