NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Pitfalls in the use of Time as an Explanatory Variable in Regression

Charles R. Nelson, Heejoon Kang

NBER Technical Working Paper No. 30
Issued in November 1983
NBER Program(s):   ME

Regression of a trendless random walk on time produces R-squared values around .44 regardless of sample length. The residuals from the regression exhibit only about 14 percent as much variation as the original series even though the underlying process has no functional dependence on time. The autocorrelation structure of these "detrended" random walks is pseudo-cyclical and purely artifactual. Conventional tests for trend are strongly biased towards finding a trend when none is present, and this effect is only partially mitigated by Cochrane-Orcutt correction for autocorrelation. The results are extended to show that pairs of detrended random walks exhibit spurious correlation.

download in pdf format
   (1270 K)

email paper

This paper is available as PDF (1270 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/t0030

Published: Nelson, Charles R. and Heejoon Kang. "Pitfalls in the Use of Time as an Explanatory Variable in Regression," Journal of Business and Economic Statistics, Vol. 2, No. 1, January 1984, pp. 73-82.

 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us