Pitfalls in the use of Time as an Explanatory Variable in Regression / Charles R. Nelson, Heejoon Kang.

Format:

Book

Author/Creator:

Nelson, Charles R.

Contributor:

National Bureau of Economic Research.

Kang, Heejoon.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0030.

NBER technical working paper series no. t0030

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1983.

Summary:

Regression of a trendless random walk on time produces R-squared values around .44 regardless of sample length. The residuals from the regression exhibit only about 14 percent as much variation as the original series even though the underlying process has no functional dependence on time. The autocorrelation structure of these "detrended" random walks is pseudo-cyclical and purely artifactual. Conventional tests for trend are strongly biased towards finding a trend when none is present, and this effect is only partially mitigated by Cochrane-Orcutt correction for autocorrelation. The results are extended to show that pairs of detrended random walks exhibit spurious correlation.

Notes:

Print version record

November 1983.