1 look at the the time series for xt 2 look for

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Unformatted text preview: ocesses. They found β to be highly significant even though it should be close to 0. Basically, one gets spurious results. The standard errors and test statistics of the normal t-tests are invalid. 14 / 52 Introduction Stationary Processes Nonstationary Processes Spurious Regressions Testing for Nonstationarity Cointegration Spurious Regressions Why do we care about nonstationarity? Because it can mess up OLS! Refer to the famous simulations by Granger and Newbold. Yt = β1 + β2 Xt + εt where X and Y are independent random walk processes. They found β to be highly significant even though it should be close to 0. Basically, one gets spurious results. The standard errors and test statistics of the normal t-tests are invalid. 15 / 52 Introduction Stationary Processes Nonstationary Processes Spurious Regressions Testing for Nonstationarity Cointegration Spurious Regressions Why do we care about nonstationarity? Because it can mess up OLS! Refer to the famous simulations by Granger and Newbold. Yt = β1 + β2 Xt + εt where X and Y are independent random walk processes. They found β to be highly significant even though it should be close to 0. Basically, one gets spurious results. The standard errors and test statistics of the normal t-tests are invalid. 16 / 52 Introduction Stationary Processes Nonstationary Processes Spurious Regressions Testing for Nonstationarity Cointegration Spurious Regressions Why do we care about nonstationarity? Because it can mess up OLS! Refer to the famous simulations by Granger and Newbold. Yt = β1 + β2 Xt + εt where X and Y are independent random walk processes. They found β to be highly significant even though it should be close to 0. Basically, one gets spurious results. The standard errors and test statistics of the normal t-tests are invalid. 17 / 52 Introduction Stationary Processes Nonstationary Processes Spurious Regressions Testing for Nonstationarity Cointegration Autocorrelation function ADF Testing for Nonstationarity There are a few ways of detecting nonstationarity of which were covered in the problem sets. 1 look at the the time series for Xt 2 look for Durbin Watson statistics close to 0 3 look at autocorrelation function of Xt 4 look at the Augmented Dickey Fuller test statistic 18 / 52 Introduction Stationary Processes Nonstationary Processes Spurious Regressions Testing for Nonstationarity Cointegration Autocorrelation function ADF Testing for Nonstationarity There are a few ways of detecting nonstationarity of which were covered in the problem sets. 1 look at the the time series for Xt 2 look for Durbin Watson statistics close to 0 3 look at autocorrelation function of Xt 4 look at the Augmented Dickey Fuller test statistic 19 / 52 Introduction Stationary Processes Nonstationary Processes Spurious Regressions Testing for Nonstationarity Cointegration Autocorrelation function ADF Testing for Nonstationarity There are a few ways of detecting nonstationarity of which were covered in the problem sets. 1 look at the the time series for Xt 2 look for...
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This document was uploaded on 03/12/2014 for the course ECON 202 at University of London University of London International Programmes (Distance Learning).

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