On spurious regressions with partial unit root processes

Abstract

This paper considers spurious regressions with partial unit root and near partial unit root processes. Three models are investigated via simulations to study the rejection probability of the associated t-statistics in detecting the spurious correlation. The results reveal that the spurious regression is a not-so-spurious problem, which cannot be eliminated by adding AR(1) errors in re-estimation. Moreover, the advocated balanced regression approach is found effective in detecting the non-existent relationship.