Qm
Statistics

Fixing a spurious regression by differencing

spurious-regressiondifferencing

You have two independent random walks and a colleague ran a levels regression that produced fake significance. You suggest regressing the first differences (the period-to-period changes) instead.

Explain why differencing removes the spurious result.

Your answer

Solving needs a free account

Answers, streaks and solutions unlock when you are signed in. Reading the question and the hint stays free.

Create a free accountSign in

Discussion

Sign in to join the discussion · reading is open to everyone

💡 Discussion rules

  1. No full solutions here. Hints and approaches only.
  2. Complexity, edge cases and intuition are the point.
  3. Interview experiences are welcome. Respect your NDAs.

Loading discussion…

Learn the concepts

The theory behind this question.

Unit Roots and the ADF TestA Benchmarking Harness for New SignalsA Practical Tuning Order for Gradient BoostingA/B TestingThe Abdi-Ranaldo Spread Estimator

Related questions

Two random walks with R² of 0.9 and no relationshipThe first difference of a random walkWhy two random walks give a spurious regressionThe Durbin-Watson clue in a spurious regressionWhen a levels regression of I(1) series is not spurious
All questions →