I thank Wonho Song and an anonymous referee for their helpful comments. Research assistance for this article was provided by Minchul Yum whom I thank This research was funded by the Sogang Research Frontier program.
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Spurious Fixed Effects Regression†
Article first published online: 21 DEC 2011
DOI: 10.1111/j.1468-0084.2011.00688.x
© Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2011
Additional Information
How to Cite
Choi, I. (2013), Spurious Fixed Effects Regression. Oxford Bulletin of Economics and Statistics, 75: 297–306. doi: 10.1111/j.1468-0084.2011.00688.x
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Publication History
- Issue published online: 4 MAR 2013
- Article first published online: 21 DEC 2011
- Final Manuscript Received: October 2011
- Abstract
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Keywords:
- C18;
- C33
Abstract
This article shows that spurious regression results can occur for a fixed effects model with weak time series variation in the regressor and/or strong time series variation in the regression errors when the first-differenced and Within-OLS estimators are used. Asymptotic properties of these estimators and the related t-tests and model selection criteria are studied by sending the number of cross-sectional observations to infinity. This article shows that the first-differenced and Within-OLS estimators diverge in probability, that the related t-tests are inconsistent, that R2s converge to zero in probability and that AIC and BIC diverge to −∞ in probability. The results of the article warn that one should not jump to the use of fixed effects regressions without considering the degree of time series variations in the data.