Is the Spurious Regression Problem Spurious?
So-called "spurious regression" relationships between random-walk (or strongly autoregressive) variables are generally accompanied by clear signs of severe autocorrelation in their residuals. A conscientious researcher would therefore not end an investigation with such a result, but would likely re-estimate with an autocorrelation correction. Simulations show, for several typical cases, that the test-rejection statistics for the re-estimated relationships are very close to the true values, so do not yield results of the spurious type.
I am greatly indebted to Dennis Epple for comments, many useful discussions, and crucial help with the software. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
McCallum, Bennett T., 2010. "Is the spurious regression problem spurious?," Economics Letters, Elsevier, vol. 107(3), pages 321-323, June. citation courtesy of