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A comment on ‘resolving spurious regressions and serially correlated errors’

Daniel Ventosa-Santaulària, J. Eduardo Vera-Valdés and Alejandra I. Martínez-Olmos
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Alejandra I. Martínez-Olmos: Universidad de Guanajuato

Empirical Economics, 2016, vol. 51, issue 3, No 20, 1289-1298

Abstract: Abstract In order to diminish size distortions of the t test in a time series linear specification, Agiakloglou (Agiakloglou in Empir Econ, 45(3):1361–1366, 2013) proposed to (1) include the first lag of the dependent variable as a regressor or (2) estimate it using the first differences of the variables. He provided finite-sample evidence to support his proposal. In this paper, we extend the Monte Carlo experiment to different data-generating processes and calculate the asymptotic behavior of the modified specifications. We show that including the lag of the dependent variable as a regressor reduces size distortions when the variables are driftless unit roots, but this approach does not hold under the presence of long memory, nonlinearities, or structural breaks.

Keywords: Spurious regression; Autocorrelation corrective methods; Unit roots; Shifts; Fractional integration; C22 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s00181-015-1035-7

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