Qm
Statistics

When a levels regression of I(1) series is not spurious

spurious-regressioncointegration

Two series XtX_t and YtY_t are each individually nonstationary (integrated of order 1), yet a levels regression of YtY_t on XtX_t is perfectly legitimate rather than spurious.

What property must the regression residuals have for this to be the case?

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.

CointegrationCointegration Breakdown RiskThe Engle-Granger Two-Step ProcedureThe Engle-Granger Two-Step ProcedureError Correction Models

Related questions

Two random walks with R² of 0.9 and no relationshipWhy two random walks give a spurious regressionThe Durbin-Watson clue in a spurious regressionFixing a spurious regression by differencingNonsense correlation between two trending series
All questions →