What is spurious correlation? a reply to DÃaz and Osuna
Studies by the author showed that strong cross-sectional correlations between industry-level values and prices are spurious. DÃaz and Osuna (2005-6) challenged this finding, arguing that the correlation results are fatally indeterminate, and that the author's procedure for eliminating spurious correlation destroys the value-price correlation because of its differential effect on the variables' standard deviations. Replying to these claims, this note argues that the charge of indeterminacy stems from DÃaz and Osuna's misunderstanding of the concept of spurious correlation, and that the author's procedure causes the value-price correlation to vanish because the correlation is spurious.
Volume (Year): 31 (2008)
Issue (Month): 2 (December)
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