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Spurious Regression and Trending Variables

  • Antonio E. Noriega
  • Daniel Ventosa-Santaulària

This paper analyses the asymptotic and finite-sample implications of different types of non-stationary behaviour among the dependent and explanatory variables in a linear spurious regression model. We study cases when the non-stationarity in the dependent and explanatory variables is deterministic as well as stochastic. In particular, we derive the order in probability of the "t"-statistic in a spurious regression equation under a variety of empirically relevant data generation processes, and show that the spurious regression phenomenon is present in all cases when both dependent and explanatory variables behave in a non-stationary way. Simulation experiments confirm our asymptotic results. Copyright 2007 Blackwell Publishing Ltd and the Department of Economics, University of Oxford.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0084.2007.00481.x
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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 69 (2007)
Issue (Month): 3 (06)
Pages: 439-444

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Handle: RePEc:bla:obuest:v:69:y:2007:i:3:p:439-444
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