Type I Spurious Regression in Econometrics

University of Technology, Finance and Economics Working Paper No. 114

18 Pages Posted: 3 Feb 2006

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Shenhuai Gao

University of Sydney Business School

Date Written: April 2002

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.

Keywords: type I spurious regression, systematic errors, invariant dynamic relations

JEL Classification: C12, C13, C22

Suggested Citation

Chiarella, Carl and Gao, Shenhuai, Type I Spurious Regression in Econometrics (April 2002). University of Technology, Finance and Economics Working Paper No. 114, Available at SSRN: https://ssrn.com/abstract=880000 or http://dx.doi.org/10.2139/ssrn.880000

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
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HOME PAGE: http://www.business.uts.edu.au/finance/

Shenhuai Gao

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

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