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Spurious Regression and Econometric Trends

Antonio Noriega () and Daniel Ventosa-Santaulària ()

No 2006-05, Working Papers from Banco de México

Abstract: 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 the 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.

Keywords: Spurious regression; trends; unit roots; trend stationarity; structural breaks (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 (search for similar items in EconPapers)
Date: 2006-04
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Working Paper: Spurious regression and econometric trends (2006)
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