Correlation, regression, and cointegration of nonstationary economic time series

Publikation: Working paperForskning

  • Institut for Økonomi
Yule (1926) introduced the concept of spurious or nonsense correlation, and showed by simulation that for some nonstationary processes, that the empirical correlations seem not to converge in probability even if the processes were independent. This was later discussed by Granger and Newbold (1974), and Phillips (1986) found the limit distributions.
We propose to distinguish between empirical and population correlation coeffients and show in a bivariate autoregressive model for nonstationary variables that the empirical correlation and regression coe¢ cients do not converge to the relevant population values, due to the trending nature of the data.
We conclude by giving a simple cointegration analysis of two interests. The analysis illustrates that much more insight can be gained about the dynamic
behavior of the nonstationary variables then simply by calculating a correlation
coe¢ cient.
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider9
StatusUdgivet - 2007

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