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Spurious Regression and Trending Variables

  • Antonio E. Noriega


    (Department of Economics and Finance, Universidad de Guanajuato)

  • Daniel Ventosa-Santaularia


    (Department of Economics and Finance, Universidad de Guanajuato)

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    This paper analyses the asymptotic and finite sample implications of different types of nonstationary behavior among the dependent and explanatory variables in a linear spurious regression model. We study cases when the nonstationarity 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 linear regression equation under a variety of empirically relevant data generation processes, and show that he spurious regression phenomenon is present in all cases considered, when at least one of the variables behaves in a nonstationary way. Simulation experiments confirm our asymptotic results.

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    File Function: Revised version, 2007
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    Paper provided by Universidad de Guanajuato, Department of Economics and Finance in its series Department of Economics and Finance Working Papers with number EM200701.

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    Length: 11 pages
    Date of creation: Sep 2006
    Date of revision: Jan 2007
    Publication status: Published in Oxford bulletin of Economics and Statistics (2007)
    Handle: RePEc:gua:wpaper:em200701
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