Spurious regression

1
Spurious regression
Dow Jones and daily temperature Spring 1999 one
of the hottest periods of the stock-exchange
bubble

• We tested them and realized that
• the Dow follows a stochastic trend (RW with
  drift),
• daily temperature follows a deterministic trend
  (throughout the spring)

2
Spurious Dow and ºF (2)
Spurious regression log(Dowt) a ßlog(tempt)
ut
Correct regression ?log(Dowt) a
ßlog_temp_detrendedt ut
3
Spurious two simulated RW
Spurious regression Yt a ßXt ut
Correct regression ?Yt a ß?Xt vt