Abstract
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 broken‐trend 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. Spin‐offs from this research range from unit‐root tests to cointegration and error‐correction models. This paper provides an overview of results about spurious regression, pulled from disperse sources, and explains their implications.
Highlights
During the last 30 years econometric theory has undergone a revolution
It was proposed that first-differenced series be used, the authors warned about the risks of catch-all solutions; their results may be considered as the seed of many fruitful extensions in time series econometrics
De Jong 59 extended the study of spurious regression using independent driftless unit root processes; he used DGP 6 to generate the series and ran the following specification, which operates with logarithmic transformation of both variables—a direction which has proved extremely relevant for empirical purposes: applying the logarithmic transformation in econometrics is typical when the practitioner wants either to homogenize the variance or to directly obtain estimates of average elasticity amongst variables : ln yt α β ln xt ut
Summary
Departamento de Economia y Finanzas, Universidad de Guanajuato, DCEA-Campus Marfil Fracc. I, 36250 El Establo, Guanajuato, Gto, Mexico. 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. 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. This paper provides an overview of results about spurious regression, pulled from disperse sources, and explains their implications.
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