Pitfalls in cross-section studies with integrated regressors : a survey and new developments
Title: Pitfalls in cross-section studies with integrated regressors : a survey and new developments
Citation: Journal of economic surveys, 2018, Vol. 32, No. 4, pp. 1045-1073
ISSN: 0950-0804; 1467-6419
In cross-section studies, if the dependent variable is I(0) but the regressor is I(1), the true slope must be zero in the resulting unbalanced regression. A spuriously significant relationship may be found in large cross-sections, however, if the integrated regressor is related to a stationary variable that enters the DGP but is omitted from the regression. The solution is to search for the related stationary variable, in some cases the first difference of the integrated regressor, in other cases, a categorical variable that can take on limited number of values which depend on the integrated variable. We present an extensive survey, new developments, and applications particularly in finance.
Subject: Categorical variables; Stock appreciation; Survey; Unbalanced regressions; Unit roots; Unit-root tests; Panel-data; Cointegration; Earnings; Returns
First published: 08 March 2018
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