A note on spurious significance in regressions involving I(0) and I(1) variables

Stewart, Chris (2011) A note on spurious significance in regressions involving I(0) and I(1) variables. Empirical Economics, 41(3), pp. 565-571. ISSN (print) 0377-7332

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We demonstrate that t ratios (the F statistic) for I(1) regressors in a model with an I(0) dependent variable will generally be oversized. This indicates that spurious significance occurs in a situation where it was not previously identified. We also compare the asymptotic rejection rates of t ratios for various combinations of I(1) and I(0) variables in the two-variable linear regression model. These rejection rates systematically increase with the degree of autocorrelation, yielding spurious significance, when both variables are either positively or negatively autocorrelated. In contrast, when one variable is negatively autocorrelated and the other is positively autocorrelated the rejection rates systematically fall and are undersized.

Item Type: Article
Research Area: Economics and econometrics
Faculty, School or Research Centre: Faculty of Arts and Social Sciences (until 2017) > School of Economics (until November 2012)
Depositing User: Christopher Stewart
Date Deposited: 30 Apr 2013 11:24
Last Modified: 29 Nov 2013 12:28
DOI: https://doi.org/10.1007/s00181-010-0404-5
URI: http://eprints.kingston.ac.uk/id/eprint/25460

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