Which of the following is the most serious problem that can arise when dealing with non-stationary data with a unit-root? A) The estimates for the variance of the coefficient are wrong. B) Regression could give us spurious results. C) Heteroscedastic errors D) A low R².

Question

Quizplus · Accepted Answer

When dealing with non-stationary data with a unit-root, regression could give us spurious results because the relationships between variables may appear to be significant, but in reality, they are not. This is known as the spurious regression problem, where the regression coefficients are biased and inconsistent. Therefore, it is important to either transform the data to become stationary or use time-series techniques specifically designed for non-stationary data, such as cointegration analysis. The other options listed may also be problems with non-stationary data but are not the most serious.

Which of the Following Is the Most Serious Problem That