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Spurious Regression and Trending Variables

Antonio Noriega () and Daniel Ventosa-Santaulària ()

No EM200701, Department of Economics and Finance Working Papers from Universidad de Guanajuato, Department of Economics and Finance

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 he 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: Trend Stationarity; Structural Breaks; Spurious Regression; Unit Roots; Trends (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2006-09, Revised 2007-01
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Published in Oxford bulletin of Economics and Statistics (2007)

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