Type I Spurious Regression in Econometrics

Spurious Regressions in Econometrics

It is very common to see reported in applied econometric literature time series regression equations with an apparently high degree of fit, as measured by the coefficient of multiple correlation R2 or the corrected coefficient R2, but with an extremely low value for the Durbin-Watson statistic. We find it very curious that whereas virtually every textbook on econometric methodology contains exp...

Spurious Regression

The spurious regression phenomenon in least squares occurs for a wide range of data generating processes, such as driftless unit roots, unit roots with drift, long memory, trend and brokentrend stationarity. Indeed, spurious regressions have played a fundamental role in the building of modern time series econometrics and have revolutionized many of the procedures used in applied macroeconomics....

Bayesian Econometrics ; Demand ; Econometrics ; Matrix Algebra ; Maximum Likelihood Regression ; Regression

yt and Pt replaced by any variables that affect supply but not demand. In the 1970s econometricians began to recognize that how the supply or demand equation is normalized affects the estimator of the supply or demand elasticity (¡M or ¬R ) when the two-stage least squares (2SLS) approach is employed. The quality of this estimator is sensitive to the strength of instruments used in the 2SLS est...

Understanding spurious regression in financial economics

In view of the fact that classic asymptotic theory can not provide satisfactory explanation for Ferson, Sarkissian and Simin’s (2003a, 2003b) simulation findings on spurious regression in the context of financial economics, we develop an alternative distributional theory. Closely related is the well-known (nearly) observational equivalence issue in unit root testing literature. This study emplo...

Econometrics II Lecture 3: Regression and Causality