Question

Please can you explain that “Spurious Regression” ? Please clarify with an economic example.

Please can you explain that “Spurious Regression” ? Please clarify with an economic example.

Homework Answers

Answer #1

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.

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