A Comment on ‘Resolving Spurious Regressions and Serially Correlated Errors’
Abstract
In order to diminish size distortions of the t-test in a time series linear specification, Agiakloglou (Agiakloglou in Empir Econ, 45(3):1361–1366, 2013) proposed to (1) include the first lag of the dependent variable as a regressor or (2) estimate it using the first differences of the variables. He provided finite-sample evidence to support his proposal. In this paper, we extend the Monte Carlo experiment to different data-generating processes and calculate the asymptotic behavior of the modified specifications. We show that including the lag of the dependent variable as a regressor reduces size distortions when the variables are driftless unit roots, but this approach does not hold under the presence of long memory, nonlinearities, or structural breaks.
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Recommended citation
Ventosa-Santaulària, D., and Vera-Valdés, J.E. and Martínez-Olmos, A.I. (2016). “A Comment on ‘Resolving Spurious Regressions and Serially Correlated Errors’.” Empirical Economics. 51(3). https://doi.org/10.1007/s00181-015-1035-7
@article{VERAVALDES2015,
author = {Ventosa-Santaulària, D. and Vera-Valdés, J.E. and Martínez-Olmos, A.I.},
title = {A Comment on 'Resolving Spurious Regressions and Serially Correlated Errors'},
journal = {Empirical Economics},
volume = {51},
number = {3},
pages = {1289-1298},
doi = {https://doi.org/10.1007/s00181-015-1035-7},
url = {https://link.springer.com/article/10.1007/s00181-015-1035-7#citeas},
year = {2015}
}