Spurious regression due to neglected of non-stationary volatility

Hao Jin, Si Zhang () and Jinsuo Zhang
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Hao Jin: Xi’an University of Science and Technology
Si Zhang: Xi’an University of Science and Technology
Jinsuo Zhang: Yan’an University

Computational Statistics, 2017, vol. 32, issue 3, No 12, 1065-1081

Abstract: Abstract This paper examines the effects of permanent changes in the variance of the errors on routine applications of standard t-ratio test in regression models. It is shown the asymptotic distribution of t-ratio test is not invariant to non-stationary in variance, and the phenomenon of spurious regression will occur independently of the structure assumed for these time series. The intuition behind this is that the non-stationary volatility can increase persistency in the level of regression errors, which then leads to spurious correlation. Monte Carlo experiment evidence indicates that, in contrast to the broken level/trend case, the presence of spurious relationship critically depends on the location and magnitude of changes, regardless of the sample size. Finally, some real data sets from the Shanghai stock database are reported for illustration.

Keywords: Spurious regression; Non-stationary volatility; t-ratio test; Asymptotic properties (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00180-016-0687-x

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