Spurious regressions driven by excessive volatility

This paper shows that the excessive volatility results in spurious regressions. The spuriousness can be driven by persistency in the error variances unlike the conventional spurious regressions that are generated by the persistency in the level of regression errors.

► We show that the presence of excessive volatility results in spurious regressions. ► The standard tests are shown to have powers decreasing down to their sizes. ► We analyze the diagnostic statistics in regressions with excessive volatile errors. ► The coefficient of determination converges in probability to zero in this case. ► The Durbin-Watson statistic converges to two.