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

  • Gueorgui I. Kolev


    (EDHEC Business School)

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    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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    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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    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "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?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    2. McCallum, Bennett T., 2010. "Is the spurious regression problem spurious?," Economics Letters, Elsevier, vol. 107(3), pages 321-323, June.
    3. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
    4. Ventosa-Santaulària, Daniel, 2008. "Spurious Regression," MPRA Paper 59008, University Library of Munich, Germany.
    5. Wooldridge, Jeffrey M., 1991. "On the application of robust, regression- based diagnostics to models of conditional means and conditional variances," Journal of Econometrics, Elsevier, vol. 47(1), pages 5-46, January.
    6. Sun, Yixiao, 2004. "A CONVERGENT t-STATISTIC IN SPURIOUS REGRESSIONS," Econometric Theory, Cambridge University Press, vol. 20(05), pages 943-962, October.
    7. 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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