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Quantitative Finance · Glossary

What is Unit root, spurious regression?

Also known as: unit root · spurious regression

Definition 17.7 Quantitative Methods · Chapter 17 — Linear Time Series

A process has a unit root if its autoregressive polynomial has a root at z=1z = 1: its first difference is stationary but the level is not, like a random walk. A spurious regression is a regression between independent processes with unit roots whose usual tt-statistics and R2R^2 indicate a relation that does not exist.

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