Finance Discipline Group
UTS Business School
University of Technology, Sydney

Working Paper Series

Title:
Type I Spurious Regression in Econometrics
Author(s): Carl Chiarella & S. Gao
Date of publication: April 2002
Working paper number: 114
Abstract:
In applied econometrics researchers often infer the relation among nonstationary time series by regression of their differences. The aim of this paper is to show that in some circumstances regression of differenced time series tends to reject the relation among their levels. This phenomenon is known as type I spurious regression. Time series are dynamic processes, and the ignored system dynamics will become the systematic errors in regression equations. Differencing does not preserve the underlying relation among time series in regression due to systematic errors. This paper will outline how regression of differenced time series tends to reject the relation between their levels, and so potentially to incur type I spurious regression.
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Known citations:

Barbosa, J. H. F., 2007, Prociclicidade do risco de crédito : um modelo point in time para o risco da carteira de crédito agregada dos bancos brasileiros, Thesis.

Chiarella, C. and Gao, S., 2002. "Modelling the Value of the S&P 500 - A System Dynamics Perspective", Working Paper Number: 115, Finance Discipline Group, University of Technology, Sydney.

Chiarella, C. and Gao, S., 2002, "Solving the Price-Earnings Puzzle", Working Paper Number: 116, Finance Discipline Group, University of Technology, Sydney.

Chiarella, C. and Gao, S., 2004, "Continuous Time Model Estimation", Working Paper Number: 138, Finance Discipline Group, University of Technology, Sydney.

Chiarella, C., Gao, S. and Stevenson, M., 2008, "Resolving the Price-Earnings Puzzle and Related Econometric Issues", Working Paper.

de Mendonça, H. F. and Veiga, I. S., 2012, "Financial Openness and Inflation Targeting: An Analysis for the Unpleasant Fiscal Arithmetic", Working Paper.

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