Spurious Fixed Effects Regression
This paper shows that spurious regression results can occur for a fixed effects model with weak time series variation in the regressor and/or strong time se- ries variation in the regression errors when the first-differenced and Within-OLS estimators are used. Asymptotic properties of these estimators and the related t-tests and model selection criteria are studied by sending the number of cross- sectional observations to infinity. This paper shows that the first-differenced and Within-OLS estimators diverge in probability, that the related t-tests are incon- sistent, that R2s converge to zero in probability and that AIC and BIC diverge to ??1 in probability. The results of the paper warn that one should not jump to the use of fixed effects regressions without considering the degree of time series variations in the data.
|Date of creation:||Apr 2010|
|Date of revision:||Jun 2011|
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- 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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