Department of Economics and Business Economics

Spurious forecasts?

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

  • B. Martínez-Rivera, Banco de Mexico
  • ,
  • D. Ventosa-Santaulària, Centro de Investigación y Docencia Económicas, Mexico
  • J. Eduardo Vera-Valdés
P. C. B. Phillips (1998) demonstrated that deterministic trends are a valid representation of an otherwise stochastic trending mechanism; he remained skeptic, however, about the predictive power of such representations. In this paper we prove that forecasts built upon spurious regression may perform (asymptotically) as well as those issued from a correctly specified regression. We derive the order in probability of several in-sample and out-of-sample predictability criteria (F test, root mean square error, Theil's U-statistics and R ) using forecasts based upon a least squares-estimated regression between independent variables generated by a variety of empirically relevant data-generating processes. It is demonstrated that, when the variables are mean stationary or trend stationary, the order in probability of these criteria is the same whether the regression is spurious or not. Simulation experiments confirm our asymptotic results.
Original languageEnglish
JournalJournal of Forecasting
Volume31
Issue3
Pages (from-to)245-259
Number of pages15
ISSN0277-6693
DOIs
Publication statusPublished - 1 Apr 2012

    Research areas

  • Forecasts, Spurious Regression, Mean Stationary, Unit Root, Broken-Trend Stationary

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