Understanding of Causes of Spurious Associations: Problems and Prospects

Abstract

This paper contributes to the social science literature when analyzing survey or time series data social scientists use spurious regression without due consideration of its assumptions and the data structure. This results in misinterpretation and misleading conclusions about the population. The paper reviews basic statistical and econometrics literature which led to the development of modern time series analysis in the presence of spurious regression. It concludes that the term ‘Spurious’ was well known before the Granger and Yule’s work in time series context rather than cross-sectional data. The same reasons can produce spurious regression today and surely the solution doesn’t exist in the cointegration analysis. Social scientists and applied econometrician investigators need more serious thinking and care to avoid spurious regression, if it is necessary even if data is stationary or cross-sectional. In this study, we extended the Ghouse experiment which is based on simulated data by employing real-world data to assess the effectiveness of the newly proposed Ghouse Equation in comparison to conventional approaches. The findings demonstrate that the Ghouse Equation produces the lowest probability of spurious regression as compared to its counterparts. Moreover, in forecasting performance, Ghouse Equation outperformed its counterparts. These results highlight the Ghouse Equation as a valuable and better tool for econometric analysis for nonstationary time series.