Publication Date: May 2008
A local limit theorem is proved for sample covariances of nonstationary time series and integrable functions of such time series that involve a bandwidth sequence. The resulting theory enables an asymptotic development of nonparametric regression with integrated or fractionally integrated processes that includes the important practical case of spurious regressions. Some local regression diagnostics are suggested for forensic analysis of such regresssions, including a local R² and a local Durbin Watson (DW) ratio, and their asymptotic behavior is investigated. The most immediate ﬁndings extend the earlier work on linear spurious regression (Phillips, 1986), showing that the key behavioral characteristics of statistical signiﬁcance, low DW ratios and moderate to high R² continue to apply locally in nonparametric spurious regression. Some further applications of the limit theory to models of nonlinear functional relations and cointegrating regressions are given. The methods are also shown to be applicable in partial linear semiparametric nonstationary regression.
Brownian motion, Kernel method, Local R², Local Durbin-Watson ratio, Local time, Integrated process, Nonparametric regression, Spurious regression
JEL Classification Codes: C23, C25
Published in Econometric Theory (2009), 25: 1466-1497 [DOI]