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A Simple Test for Spurious Regressions

Antonio Noriega () and Daniel Ventosa-Santaulària ()

No 2011-05, Working Papers from Banco de México

Abstract: It has been found that the t-statistic for testing the null of no relationship between two independent variables diverges asymptotically under a wide variety of nonstationary data generating processes. This paper introduces a simple method which guarantees convergence of this t-statistic to a pivotal limit distribution, when there are drifts in the integrated processes generating the data, thus allowing asymptotic inference. This method can be used to distinguish a genuine relationship from a spurious one among integrated (I(1) and I(2)) processes. Simulation experiments show that the test has good properties in small samples. When applying the proposed procedure to real data (including the marriages and mortality data of Yule), we do not find (spurious) significant relationships between the variables.

Keywords: Spurious Regression; Integrated Process; Detrending; Asymptotic Theory; Cointegration; Monte Carlo Experiments. (search for similar items in EconPapers)
JEL-codes: C12 C15 C22 C46 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets
Date: 2011-08
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