Type I Spurious Regression in Econometrics

Carl Chiarella and Shenhuai Gao
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Shenhuai Gao: Discipline of Economics, University of Sydney

No 114, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: In applied econometrics researchers often infer the relation among nonstationary time series by regression of their differences. The aim of this paper is to show that in some circumstances regression of differenced time series tends to reject the relation among their levels. This phenomenon is known as type I spurious regression. Time series are dynamic processes, and the ignored system dynamics will become the systematic errors in regression equations. Differencing does not preserve the underlying relation among time series in regression due to systematic errors. This paper will outline how regression of differenced time series tends to reject the relation between their levels, and so potentially to incur type I spurious regression.

Keywords: type I spurious regression; systematic errors; invariant dynamic relations (search for similar items in EconPapers)
JEL-codes: C12 C13 C22 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2002-04-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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