ARDL model as a remedy for spurious regression: problems, performance and prospectus
Ghulam Ghouse,
Saud Ahmed Khan and
Atiq Rehman
MPRA Paper from University Library of Munich, Germany
Abstract:
Spurious regression have performed a vital role in the construction of contemporary time series econometrics and have developed many tools employed in applied macroeconomics. The conventional Econometrics has limitations in the treatment of spurious regression in non-stationary time series. While reviewing a well-established study of Granger and Newbold (1974) we realized that the experiments constituted in this paper lacked Lag Dynamics thus leading to spurious regression. As a result of this paper, in conventional Econometrics, the Unit root and Cointegration analysis have become the only ways to circumvent the spurious regression. These procedures are also equally capricious because of some specification decisions like, choice of the deterministic part, structural breaks, autoregressive lag length choice and innovation process distribution. This study explores an alternative treatment for spurious regression. We concluded that it is the missing variable (lag values) that are the major cause of spurious regression therefore an alternative way to look at the problem of spurious regression takes us back to the missing variable which further leads to ARDL Model. The study mainly focus on Monte Carlo simulations. The results are providing justification, that ARDL model can be used as an alternative tool to avoid the spurious regression problem.
Keywords: Spurious regression; misspecification; Stationarity; unit root; cointegration and ARDL (search for similar items in EconPapers)
JEL-codes: B41 C4 C5 C53 (search for similar items in EconPapers)
Date: 2018-01-10
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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Citations: View citations in EconPapers (14)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:83973
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