A spurious regression refers to a situation where:
A)the direction of the relationship between the dependent variable and the explanatory variables is uncertain.
B)even though two variables are independent, the OLS regression of one variable on the other indicates a relationship between them.
C)a few important and necessary explanatory variables are left out of a regression equation, thus leading to inefficient and inconsistent forecasts.
D)at least one of the variables used in a regression equation does not have a unit root and the error terms are heteroskedastic.

Question

Quizplus · Accepted Answer

A spurious regression occurs when two independent variables show a strong statistical relationship in a regression analysis, even though there is no causal relationship between them. This can happen due to chance, random fluctuations, or the presence of other variables that are not included in the regression model. Therefore, the situation described in option B fits the definition of a spurious regression.

A Spurious Regression Refers to a Situation Where