A simple solution for spurious regressions |
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Authors: | Daniel Ventosa-Santaulària Antonio E Noriega |
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Institution: | 1. Centro de Investigación y Docencia Económicas, División de Economía, Del. álvaro Obregón, Distrito Federal, Mexicodaniel.ventosa@cide.edu;3. Banco de México, Distrito Federal, Mexico |
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Abstract: | ABSTRACTThe literature on spurious regressions has found that the t-statistic for testing the null of no relationship between two independent variables diverges asymptotically under a wide variety of non stationary data-generating processes for the dependent and explanatory variables. This paper introduces a simple method which guarantees convergence of this t-statistic to a pivotal limit distribution, thus allowing asymptotic inference. This method can be used to distinguish a genuine relationship from a spurious one among integrated processes. We apply the proposed procedure to several pairs of apparently independent integrated variables, and find that our procedure does not find (spurious) significant relationships. |
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Keywords: | Cointegration Detrending Integrated process Monte Carlo experiments Spurious regression |
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