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A Note On Spurious Regression In Panels With Cross-Section Dependence

  • Su, Jen-Je
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    This paper analyses regression of two independent stationary panels with cross-sectional dependence. It is shown that the pooling least squares (PLS) estimator converges to zero in probability while the individual OLS estimator converges to a random variable. However, the PLS-based and the OLS-based t-statistics diverge, so the null hypothesis of no correlation tends to be spuriously rejected.

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    File URL: http://purl.umn.edu/23712
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    Paper provided by Massey University, Department of Applied and International Economics in its series Discussion Papers with number 23712.

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    Date of creation: 2003
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    Handle: RePEc:ags:masddp:23712
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    1. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
    2. MOON, Hyungsik Roger & PERRON, Benoit., 2002. "Testing for a Unit Root in Panels with Dynamic Factors," Cahiers de recherche 2002-18, Universite de Montreal, Departement de sciences economiques.
    3. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
    4. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    5. 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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