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Spurious Instrumental Variables

Ventosa-Santaulària, Daniel (2007): Spurious Instrumental Variables. Published in: Communications in Statistics: Theory and Methods , Vol. 39, (2010): pp. 1997-2007.

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Spurious regression phenomenon has been recognized for a wide range of Data Generating Processes: driftless unit roots, unit roots with drift, long memory, trend and broken-trend stationarity, etc. The usual framework is Ordinary Least Squares. We show that the spurious phenomenon also occurs in Instrumental Variables estimation when using non-stationary variables, whether the non-stationarity component is stochastic or deterministic. Finite sample evidence supports the asymptotic results.

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