Journal of Statistical Theory and Applications (2024) 23:44–66

https://doi.org/10.1007/s44199-024-00072-0

RESEARCH ARTICLE

Understanding of Causes of Spurious Associations:

Problems and Prospects

Ghulam Ghouse1 · Atiq Ur Rehman2 · Muhammad Ishaq Bhatti3

Received: 30 March 2023 / Accepted: 24 January 2024 / Published online: 4 March 2024
© The Author(s) 2024

Abstract
This paper contributes to the social science literature when analyzing survey or
time series data social scientists use spurious regression without due consideration
of its assumptions and the data structure. This results in misinterpretation and mis-
leading conclusions about the population. The paper reviews basic statistical and
econometrics literature which led to the development of modern time series analysis
in the presence of spurious regression. It concludes that the term ‘Spurious’ was
well known before the Granger and Yule’s work in time series context rather than
cross-sectional data. The same reasons can produce spurious regression today and
surely the solution doesn’t exist in the cointegration analysis. Social scientists and
applied econometrician investigators need more serious thinking and care to avoid
spurious regression, if it is necessary even if data is stationary or cross-sectional. In
this study, we extended the Ghouse experiment which is based on simulated data by
employing real-world data to assess the effectiveness of the newly proposed Ghouse
Equation in comparison to conventional approaches. The findings demonstrate that
the Ghouse Equation produces the lowest probability of spurious regression as com-
pared to its counterparts. Moreover, in forecasting performance, Ghouse Equation
outperformed its counterparts. These results highlight the Ghouse Equation as a val-
uable and better tool for econometric analysis for nonstationary time series.

Keywords Spurious Regression · Spurious Correlation · Stationarity · Unit root

testing · Cointegration · ARDL · Ghouse Equation

Extended author information available on the last page of the article

1Vol:.(1234567890)
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Journal of Statistical Theory and Applications (2024) 23:44–66 45

JEL Classification C18 · C22 · C50

1 Introduction

Spurious regression is a very famous phenomenon in Econometrics [13]. The

struggle to avoid the existence of spurious regression led to the development of
modern time series analysis. The core objective of unit root and cointegration
procedures, which are now the starting point of time series analysis, is to differ-
entiate between genuine and spurious regression [3]. However, despite this level
of the popularity of the term, the concept is quite misunderstood. The popular
understanding of the term today is quite different from the understanding of the
term used by its inventors and early users. The objective of this paper is to dis-
cuss the popular understanding of this term and its meaning. The implications of
the poor understanding of the term are also discussed.
Spurious regression is one of the most popular concepts in econometrics and at
the same time, it is the most misunderstood concept, even by the topmost profes-
sionals. Clive Granger is the person who wrote a highly cited paper explaining
the spurious regression in time series coauthored with Paul Newbold and he won
the Nobel Prize in Economic Sciences in 2003 for introducing a method to avoid
spurious regression. While defining the spurious correlation, Granger writes:
“A spurious regression occurs when a pair of independent series but with
strong temporal properties, are found apparently to be related according
to standard inference in an OLS regression. [Granger Hyung and Geon,
(2001)]”.
The word ‘temporal dependence’ used by Granger et al. [6] indicates that the
term describes a time series phenomenon that occurs when a series has temporal
dependence. Therefore, the concept is necessarily linked with the time series. Not
only Granger, but many other top economists have also used the term spurious
regression and/or spurious correlation only in a time series context. Ventosa-San-
taularia (2009) wrote an article titled ‘Spurious Regression’ in which he wrote:
“The spurious regression phenomenon in Least Squares occurs for a wide
range of Data Generating Processes, such as drift less unit roots, unit roots
with drift, long memory, trend and broken-trend stationarity”.
This means that, though not explicitly stated, the authors assume spurious
regression to be a time series phenomenon because all reasons mentioned for
spurious regression are in the time series context. The legendary econometri-
cian David F. Hendry wrote a paper entitled ‘Econometrics-Alchemy or Science’,
where he gives two examples of spurious regression, and both examples come
from time series data [8]. Peter Phillips defines spurious regression more realisti-
cally. Philips (1998) writes:

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46 Journal of Statistical Theory and Applications (2024) 23:44–66

“In a prototypical spurious regression, the fitted coefficients are statistically

significant when there is no “true relationship” between the dependent vari-
able and the regressors”.
There is no mention of the time series context in Philips’s definition of spuri-
ous regression. However, all of the work on spurious regression by Peter Philips
revolves around time series spurious regression. He is the person who for the first
time analytically explained the spurious regression phenomenon in non-station-
ary time series.
Given these circumstances, it is really hard to imagine the spurious regres-
sion in a context not involving time series. All standard econometrics textbooks
discuss the term in a time series context and more particularly in the context of
non-stationary time series.

2 Meaning of Spurious Regression

The terms spurious regression and/or spurious correlation have roughly the same
history as the term regression itself. The correlation and regression analysis were
invented by Sir Francis Galton in around 1888 and were popularized by Karl
Pearson and George Undy Yule. Pearson wrote a paper in 1897 with the follow-
ing title, ‘Mathematical Contributions to the Theory of Evolution: On a Form of
Spurious Correlation Which May Arise When Indices Are Used in the Measure-
ment of Organs’ [10]. This title indicates a number of important things about the
term spurious correlation: (a) the terms spurious regression was known as early
as 1897, that is, less than 10 years after the invention of correlation analysis (ii)
there were more than one types of spurious correlation known to the scientists of
that time, therefore, the author used the phrase ‘On a Farm of Spurious Regres-
sion’ (iii) the cause of spurious correlation mentioned in the title of paper has
nothing to do with the time series properties/context. Instead of this, the ‘use of
indices’ is considered as the reason for spurious regression which is indicative of
cross-sectional context. Pearson in the same paper, defines the spurious correla-
tion as follows:
“As a matter of fact, since the coefficients of variation for femur, tibia, and
humerus are approximately equal, there would be, as we shall see later, a cor-
relation of about 0.4 to 0.5 between these indices had the bones been sorted
absolutely at random. I term this a spurious organic correlation, or simply a
spurious correlation [10]”.
This paragraph indicates that the variables where spurious regression was seen
by Pearson were random; having no relationship between them, but the calculated
correlation coefficient was seen between 0.4–0.5, an exaggerated number indicating
high correlation. This is how the term spurious correlation was understood by Karl
Pearson, one of the founding fathers of econometrics. Brown et al. [2] wrote a paper
with the title ‘A study of Index Correlation’ in which they note:

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Journal of Statistical Theory and Applications (2024) 23:44–66 47

“But we know that the mixing of heterogeneous records having entirely differ-
ent mean values leads to the production of correlations which are “spurious”
and do not measure any real association between the variable”.
This excerpt again clarifies that (i) the term spurious correlation was well known
to the experts in 1914 (ii) the term was used for unrealistic outcomes of correlation
coefficient in cross-sectional data (iii) the reason for spurious correlation as they
understand was not any kind of temporal dependence but the mixing of heterogene-
ous records.
Similarly, one can find that many kinds of spurious correlations were known to
experts in the first two decades of the twentieth century. These kinds of spurious
correlations include the correlation due to the use of indices [10], spurious corre-
lation due to variations in the magnitude of the population [15], spurious correla-
tion due to the mixing of heterogeneous records [2], etc. The most important reason,
however, was the missing third variable. Yule, in his 1926 paper ‘Why do we some-
times get non-sense regression in time series….’, explains the occurrence of spuri-
ous regression as:
“I cannot regard time per se as a causal factor; and the words only suggest
that there is some third quantity varying with the time to which the changes in
both the observed”.

3 Granger and Newbold Experiment and Spurious Regression

Granger and Newbold [5] performed a simulated study in which they generated
two independent random walk time series xt = xt−1 + 𝜀t and yt = yt−1 + vt . The two
series are non-stationary in the sense that their second moment doesn’t remain con-
stant over time. The correlation of error terms of both series is zero so both series
are independent of each other. The two variables don’t have any common missing
factor to which the movement of the two series can be attributed. Now the regres-
sion of the type yt = 𝛼 + 𝛽xt + 𝜖t should give an insignificant regression coefficient,
but the Monte Carlo experiment of Granger and Newbold yielded a very high prob-
ability of getting a significant coefficient. The probability of getting this spurious
significance did not reduce with the increase in sample size. Therefore, Granger and
Newbold concluded that spurious regression occurs due to non-stationarity. This
explanation was taken by the profession and now spurious regression has become a
synonym of time series spurious regression.
Three factors are important to be considered regarding the study of Granger and
Newbold. First, the above cited literature indicates that the spurious correlation in
the cross-sectional data was quite well known to the practitioners in 1910’s and 1920
and the Granger-Newbold experiment is not capable of explaining this cross-sec-
tional spurious correlation. Second, even for the time series spurious correlation, the
existing understanding was that it was due to missing variable(s). The Granger New-
bold experiment shows that spurious correlation can occur due to non-stationarity,
it does not deny that missing a third variable can also generate spurious correlation.

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48 Journal of Statistical Theory and Applications (2024) 23:44–66

Third, the experiment does not prove that stationary series cannot produce spurious
correlation.
However, the profession adapted three misunderstandings from the paper which
were actually not implied by their experiment. Now, in most modern econometric
textbooks, you would find the discussion on spurious correlation/spurious regression
only in the time series context, and that too, in combination with the non-stationarity.

4 Spurious Correlation in Time Series Phenomenon

A Spurious correlation is often observed in time series data. This section attempts
to answer a major question, ‘Is spurious correlation needed in time series phenom-
enon?’. To answer this question, we begin by considering the following small data
set (a sample of 16 observations) in Table 1 is given to justify the question raised:
This is a mixture of two different data sets. The first eight observations contain
two columns of independent random numbers from Gaussian distribution with a
mean 3 and variance of 1. The last eight observations contain similar columns of
Gaussian random numbers with a mean 8 and variance of 1. The X and Y are inde-
pendent of each other. There is absolutely no temporal property in the two variables
and the data does not have any characteristic of typical time series data. The data is
plotted in the following graph:
The graph shows that there are two clusters with each cluster showing no or very
weak correlation between X and Y. But if we take the two clusters together, it will
show a strong correlation. The correlation coefficient calculated for this data set was
88% which is no doubt very high, even though the two columns are independent.
This shows that spurious correlation can occur even when there is no time series
structure in the data.

Table 1  Data Form Gaussian Mean = 3 and variance = 1 Mean = 8 and variance = 1
Distribution with Different
Mean and Same Variance S.N X Y S.N X Y

1 2.35 1.43 9 6.11 8.81

2 2.80 2.95 10 8.20 8.21
3 3.36 1.25 11 7.14 8.32
4 4.60 3.09 12 7.73 8.75
5 2.80 2.91 13 8.34 9.19
6 3.81 4.34 14 7.60 8.76
7 2.60 3.14 15 8.62 7.94
8 0.74 4.59 16 9.70 9.79

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Journal of Statistical Theory and Applications (2024) 23:44–66 49

5 Sources of Spurious Correlation?

There are numerous sources of spurious correlation, some of which are mentioned
by Aldrich. Few common sources of spurious correlation are described as under.

5.1 Spurious Correlation due to Mixing Non‑homogenous Groups

This form of spurious correlation was known to experts as early as 1914, as

reported by Brown et al. [2] in their paper:
“Mixing of heterogeneous records having entirely different mean values
leads to the production of correlations which are “spurious” and do not
measure any real association between the variable”.
The example cited in the previous section is an example of the correlation that
occurs due to mixing two non-homogenous groups. The first eight observations
belong to one group whereas the last eight observations belong to the second
group.
This kind of situation can frequently occur in the analysis of real data. Consider
the data on the heights of individuals including male and female. It is well known
that female usually has shorter height and less weight, and that there exists medium
level correlation between height and weight of females. The male individuals, on the
other hand, have relatively more height and more weight. The data on heights and
weights of randomly selected individuals from the two genders will form two sepa-
rate clusters similar to the clusters shown in Fig. 1 and when taken together, the data
shall show a very strong correlation between heights and weights.
‘Shoe size and intelligence’ is an example often quoted in the literature related
to the teaching of correlation coefficient (e.g. [4]. Consider a researcher going to
a high school and taking a random sample of the students present in the school
so that every student of the school is having an equal chance of being selected in

10
9
8
7
6
5
4
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10

Fig. 1  Scatter plot of X and Y

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50 Journal of Statistical Theory and Applications (2024) 23:44–66

the sample. The researcher is taking readings on the ability to solve mathematical
problems and the shoe size of students selected in the sample. The sample selec-
tion is unbiased, and taking a large sample may reduce the sampling error. The
researcher finds that there is a very high correlation between the size of the shoe
and the ability to solve mathematics. Would this be sufficient to argue that the
admission policy of the school should be based on the measurement of shoe size?
The fact is that if the sample is selected from a high school having classes from
grades 0 to 10, this kind of observation is almost sure to occur. The pupils in higher
classes have larger shoe sizes and have more mathematical skills compared to stu-
dents in lower grades. Therefore, a high correlation is expected. However, if we take
data from only one class, say grade III, we will not see such a high correlation.
This phenomenon is shown in the Fig. 2. The lower-most ellipse indicates the
relationship between shoe size and mathematical skills for students of grade 1. The
students are the youngest, having very small mathematical skills and very small shoe
sizes. The ellipse does not have any slope, indicating an insignificant relationship
between the two variables. The second ellipse corresponds to student of class II and
it again shows almost zero correlation between variables on two axes. Similarly, for
every class separately, there is no relationship between the two variables. But if we
take all these ellipses together, we will get a very significant slope and consequently
a very high correlation between two variables.
How this correlation has emerged? This can be explained in many ways: First,
the apparent high correlation is due to the mixing of non-homogenous groups. Each
class is a homogenous group, but class I and class IX put together make a non-
homogenous group leading to a spurious correlation. Second, since the days of Yule,
missing common cause is considered an important reason for spurious correlation.

Fig. 2  Correlation between Size of Shoe and Ability to do Mathematics. Source: Goodwin and Leech
[4]

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Journal of Statistical Theory and Applications (2024) 23:44–66 51

The class/age of the students is a significant determinant of their mathematical

skills, as well as of their shoe size. This common cause governs the correlation
between two variables and the missing common cause has made the two variables
have very high correlation. Third, in the regression context, the omitted variable bias
can be held responsible for spurious regression. It is well known that if the true data
generating process is yi = 𝛼 + 𝛽xi + 𝛾zi + 𝜖, but the researcher estimates the model
yi = 𝛼 + 𝛽xi + 𝜖 in which the variable z is missing. In this case, it is very easy to
show that the estimate 𝛽̂ would be biased. In our example, the data generating pro-
cess for mathematical skills contains the variable age. Any regression missing this
variable would be biased, and this bias can lead to spurious regression.

5.2 Missing Common Cause

In his highly cited paper, Yule [16] considers missing common cause as a reason for
the spurious correlation. Therefore, Yule writes:
“I cannot regard time per se as a causal factor; and the words only suggest
that there is some third quantity varying with the time to which the changes in
both the observed variables are due.”
Yule presented this common cause diagnosis of the spurious regression problem
for the time series data. Though there were many other explanations for spurious
regression problems, the missing common cause was the popular explanation for
non-sense correlation from the times of Yule [16] till 1974, when Granger and New-
bold wrote their seminal paper explaining the spurious regression. Granger and New-
bold generated two independent random walk series xt = xt−1 + 𝜀t andyt = yt−1 + 𝜖t
where 𝜀t and𝜖t weretwo IID series with no mutual correlation. In this case, the two
series are independent and there is no mutual correlation. There is no third variable
that can be attributed to as common cause. In such a scenario, the regression of the
type yt = 𝛼 + 𝛽xt + ut should give insignificant results. But the Granger and New-
bold’s Monte Carlo experiment showed that the probability of getting a significant
coefficient is very high and this probability increases with the increase in sample
size. The series having this type of DGP are non-stationary, therefore Granger and
Newbold concluded that the non-stationarity is a reason for spurious regression.
Granger and Newbold [5]’s findings are often misunderstood. There is no doubt
that these findings imply that non-stationarity may lead to spurious regression,
but these findings never imply that non-stationarity is the ‘only’ reason for spuri-
ous regression. In addition, neither do these findings deny missing common cause
as a reason for spurious regression nor do they imply that spurious regression is
only a time series phenomenon. Even today, the common cause can be shown as an
extremely important reason for the spurious regression.
Consider the following scenario: a professor leaves home early in the morning,
drops his son at school and then he/she comes to the university to deliver a lecture.
The data on travel to school and travel to university, which is a time series data,
will have quite a high correlation, but this is obviously due to a common cause,
that is the timing which makes two variables have such a high correlation. Missing

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52 Journal of Statistical Theory and Applications (2024) 23:44–66

common cause will make us believe that there is a high association between children
proceeding to school and the arrival of a professor. But the professor has a son who
also goes to university and the son whose father is not a professor also travels to
university.
This kind of situation can occur frequently in economics. Consider two firms A
and B, both having high dependence on the policy rate announced by the central
bank, but having nothing in common with each other. A lower policy rate enhances
the profits of the two firms, therefore, the profits of the two firms will appear to have
quite a high correlation when in fact there is no direct link between the two firms.
To illustrate the importance of the common cause, I have performed a Monte
Carlo experiment whose design is as follows:
Consider three series generated as follows.
xt = 0.5xt−1 + 𝜀t (1)

wherex0 = 0 and 𝜀t ∼ IIDN(0, 1) (2)

yt = 0.5xt−1 + vt (3)

wherey0 = 0 and vt = 0.2vt−1 + et and et ∼ IIDN(0, 1)

zt = 0.5xt−1 + ut (4)

wherez0 = 0 and ut = 0.2ut−1 + 𝛾t and 𝛾t ∼ IIDN(0, 1)

t = 1, 2, … T
The series yt and zt have a common cause which is xt , and there is no direct rela-
tionship between yt and zt . There is no non-stationarity anywhere in the data gener-
ating process. Given this data generating process with a length of time series T = 40,
the regression of yt on zt has a 75% probability of being significant. Changing the
magnitude of coefficients and length of time series changes the probability of get-
ting a significant regression coefficient but it remains more than 60% in most of the
scenarios. The series yt and zt can be seen as profits of firm’s A and B which have
mutually independent governance and business but the business depends on the cen-
tral bank’s policy rate. This common determinant of profit will make the two series
appear to have a very high correlation.

5.3 Outliers

Outliers are the data points that seem quite different from the rest of the data set.
Outliers can make a data set to show a high correlation when in fact there is a no
correlation and conversely, outliers can make a data set to show that there is a weak
correlation when in fact there is a high correlation. A popular example of such

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Journal of Statistical Theory and Applications (2024) 23:44–66 53

Fig. 3  Correlation in Presence of Outliers

correlation created by outliers is present in Anscombe data [1]. The Anscombe data
consist of four data sets having same correlation coefficients and regression lines,
but only one data set qualifies as a realistic description of data.
Consider the bottom right panel of Fig. 3 of the Anscombe data set. All data
points form a vertical line showing that changes in Y are not attributable to changes
in X. There is one outlier away from the rest of the data which makes the regres-
sion line appear to have a significant positive correlation. Obviously, this is not a
genuine correlation and can be termed a spurious correlation because it exagger-
ates the strength of the true relation between X and Y. On the other hand, the data
in the bottom left panel consists of a number of points that can be fitted to a single
straight line so that the correlation should be 100%, but one outlier makes the cor-
relation lose and the computed correlation coefficient is 82%. This phenomenon is
also explained by [7].

5.4 Spurious Correlation due to the Use of Indices

This kind of spurious correlation was noted first by Pearson [10] and was explained
by [15]. Probably the first time the term spurious correlation was used for this type
of correlation. Karl Pearson explains this kind of correlation as follows:
If u = f1 (x, y), andv = f2 (z, y) be two functions of three variables x, y, z, and
these variables be selected at random so that there exists no correlation between
x, y, y, zorz, x , there will still be found to exist a correlation between u and v. Thus
real danger arise when a statistical biologist attributes the correlation between two
functions like u and v to the organic relationship.
This kind of situation can occur very frequently in economics, the GDP per Cap-
ita and FDI per Capita, divided by the same denominator which is population, can
easily produce such a correlation. Tax to GDP ratio and health expenditure to GDP,
having the same denominator GDP can also be assumed to have such a relation-
ship. Even with the cross-sectional data, one can find examples where two different

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variables are divided by a third variable. The assets per employee and profits per
employee of a firm can result in a situation similar to one observed by Pearson [10].
The reason why indices/ratios lead to such spurious correlation is explained by
Yule [15]. He proves mathematically that in assuming the situation described by
Pearson [10], the expectation of correlation between variables u and v is non-zero
even when variables x, y, andz are independent of each other.

5.5 Ecological Correlation

Let Gi i = 1, 2 … N be a group of observations representing observation on two

variables xandy and each group contains n observation. These observations can
be represented as xij andyij where i represents the number of groups and j rep-
resents the order of particular observations in his group. Let xi = 1n j xij and
∑
yi = n j yij . The correlation between xi and yi is termed as ecological correlation.
1 ∑

One can have a more general form of ecology where a number of observations in
each group is different from one another. The ecological correlation would be the
correlation between the group-average of variables xandy. It has been observed in
a large number of studies that ecological correlation often exaggerates the corre-
lation between xandy. Consider the example of the relationship between shoe size
and mathematical skills.
Figure 4 represents the data on variable shoe size xand ability to do mathemat-
ics y discussed in Sect. 3 above. The left panel is a reproduction of Fig. 1 with
the addition of group mean to the data for each class. The right panel plots only
the class averages without going to the individuals. As discussed in section three,
given any one class, there is no relationship between shoe size and mathematical
ability and the result is an ellipse without any slope. However, all these ellipses
taken together seem to have a strong relation. But when we plot the averages, they
seem fitted to a straight line indicating near perfect correlation between xandy.
Therefore, this example indicates that the correlation between averages overesti-
mates the correlation variables.
Ecological correlation can also be seen very frequently in econometrics. In
panel data, every cross-section can be regarded as a group and if the averages for

Fig. 4  Correlation Between Size of Shoe and Ability to Mathematics. Source: Goodwin and Leech [4]

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Journal of Statistical Theory and Applications (2024) 23:44–66 55

Table 2  Data on GDP Growth and Inflation from 2010 to 2016

Australia Bahrain Bulgaria Canada
Year Growth Inflation Growth Inflation Growth Inflation Growth Inflation

2010 2.05 2.85 4.33 1.96 1.32 2.44 3.08 1.78

2011 2.45 3.3 1.98 -0.4 1.91 4.22 3.14 2.91
2012 3.89 1.76 3.73 2.75 0.03 2.95 1.75 1.52
2013 2.64 2.45 5.42 3.31 0.86 0.89 2.48 0.94
2014 2.56 2.49 4.35 2.65 1.33 -1.4 2.86 1.91
2015 2.35 1.51 2.86 1.84 3.62 -0.1 1 1.13
2016 2.83 1.28 3.22 2.8 3.94 -0.8 1.41 1.43
Average 2.68 2.23 3.70 2.14 1.86 1.17 2.25 1.66

3
Inflation

0
0 1 2 3 4 5 6
-1

-2
GDP Growth

Fig. 5  Scatter Plot of GDP Growth and Inflation. Source: Author

the country are used, they will lead to ecological correlation. Consider the fol-
lowing data set in Table 2:
The data set is collected from WDI. It contains information on GDP growth
and consumer price inflation for six countries including Australia, Bahrain, Bul-
garia, and Canada. The last row of the Table gives the 7-year average of GDP
growth and inflation for the sample countries. The data on the two variables for
all samples is plotted in Fig. 5:
Figure 5 does not provide evidence of any significant correlation between the two
variables and the calculated coefficient of correlation is just 12.7%. While Fig. 6 dis-
plays the 7 years averages for the sample countries.

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2.4

2.2

1.8
Inflation

1.6

1.4

1.2

1
1.5 2 2.5 3 3.5 4
GDP Growth

Fig. 6  Scatter Plot of Averages of GDP Growth and Inflation

Figure 6 shows that the averages are strongly correlated. The calculated correla-
tion coefficient between the two variables is 79.5%, indicating a very strong associa-
tion whereas actual correlation between the two variables is only 12.7%.

6 Spurious Regression with Stationary Variables

As stated earlier, Granger and Newbold [5] found that regression between two sta-
tionary series might be spurious. This research did not imply that non-stationary is
the only cause of spurious regression, but most practitioners took this impression,
and the word ‘spurious regression’became synonymous with time series spurious
regression. On the other hand, the fact is that stationary series may also produce
spurious regression. This fact was later on recognized by Granger himself. There-
fore, Granger et al. [6] writes:
“A spurious regression occurs when a pair of independent series, but with
strong temporal properties, are found apparently to be related according to
standard inference in an OLS regression. Although this is well known to occur
with pairs of independent unit root processes, this paper finds evidence that
similar results are found with positively autocorrelated autoregressive series
or long moving averages. This occurs regardless of the sample size and for
various distributions of the error terms”.
Granger et al. [6] performed a Monte Carlo experiment in which they generated
independent stationary series with some positive autoregressive coefficient. They
noted that given any pair of mutually independent stationary series with autoregres-
sion and with infinite time series length, the probability of spurious regression still

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Journal of Statistical Theory and Applications (2024) 23:44–66 57

exists. Granger et al. [6] generated a two time series by following data generating
process:
xt = 𝜃x xt−1 + 𝜀xt (5)

yt = 𝜃y yt−1 + 𝜀yt (6)

The two series would be stationary if 𝜃x < 1 and 𝜃y < 1. They took 𝜃x = 𝜃y = 0.5
and found that the probability of getting a significant coefficient in regression
yt = 𝛼 + 𝛽xt + 𝜀t is about 13% when the nominal size is 5%. They also note that
increasing the time series length didn’t decrease the probability of spurious regres-
sion. If the autoregressive coefficient is brought closer to 1, the probability of getting
a significant coefficient also increases. With 𝜃x = 𝜃y = 0.9, the probability of getting
a significant coefficient becomes more than 50%.
Granger et al. [6] make one conceptual correction that spurious regression is
not bound to non-stationarity but still leaves behind one major misconception
and one huge question mark. The misconception is to peg the spurious regres-
sion with time series context. As shown earlier, the term spurious regression was
introduced much before the time of Granger and the early users of this term didn’t
have any time series context in mind. The question mark left behind is ‘how
to deal with spurious regression in stationary series?’ The modern time series
econometrics (that started after the seminal paper of Nelson and Plossor (1982)
developed a remedy for spurious regression in the form of cointegration analy-
sis. Cointegration analysis rests because spurious regression exists due to non-
stationarity. But, as discussed by Granger et al. [6], if spurious regression can
exist without non-stationarity, how to handle the problem? There is no satisfac-
tory answer to the question. Rehman and Malik [12] show that spurious regres-
sion exists in stationary time series, regardless of sample size, specification of
deterministic time trend, and distribution of error term.

7 Ghouse Experiment and Remedy for Spurious Regression

Ghouse et al. [3] investigated the existence of spurious regression in stationary

and nonstationary variables, and found that the spurious regression can be found
in stationery and unit root series. The unit root and cointegration are usually used
to hold the problem of spurious regression due to the non-stationarity of series
but due to the accumulation of type I and type II errors these tools lose their
validity to some extent. While there is no valid tool to tackle the spurious regres-
sion in stationary series. According to Ghouse:
“The correct specification of a regression model is a crucial concern, and
frequently, models encounter misspecification issues. This occurs when
certain irrelevant variables gain significance by serving as proxies for the

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58 Journal of Statistical Theory and Applications (2024) 23:44–66

true variables, leading to a phenomenon known as spurious regression. To

address this, missing variables can be substituted with lag values, acting as
genuine proxies. The absence of these lag values is a primary cause of spu-
rious regression in both stationary and nonstationary time series”
Ghouse et al. [3] proposed a methodology Ghouse Equation (GE) based on an
autoregressive distributed lag mechanism. Suppose we have two variables xt and
yt generated by following the Eqs. (5) and (6) with 𝜃x = 𝜃y = 1 for non-station-
ary series and with 𝜃x = 𝜃y = 0.1 − 0.9 for stationary series. Both variables are
independent and the data generating process of both variables is autoregressive.
Granger and Newbold [5] regressed nonstationary variables yt on xt and found
spurious regression.
According to Ghouse et al. [3] the true determinant of yt is the lag of yt and
by following the axiom of correct specification the yt determinants of dependent
must be in the equation then the equation will be:
yt = 𝜃y yt−1 + 𝜃1x xt + 𝜃2x xt−1 + 𝜀yt (7)
Equation (7) looks like the ARDL model and it significantly reduces the probabil-
ity of spurious regression because it does not allow xt to come up with significant
results. This equation is equally applicable in the case of stationary series.
Ghouse et al. [3] introduced an alternative tool to deal with spurious regression
with non-stationary time series but they used simulated data. This study used real
data to test the validity of the Ghouse Equation (GE). We analyzed the size anal-
ysis forecast performance of GE and commonly used conventional cointegration
procedures,Engle and Granger (EG), and Johansen and Juselius (JJ) cointegration
tests. The forecast performance is tested based on real data. The real data consists of
gross domestic product (GDP, at constant LCU) and household final consumption
expenditures (HFC, at constant LCU) for the period of 1960 to 2019. The data is
based on ten lower middle-income countries Pakistan, Bangladesh, India, SriLanka,
Indonesia, Bolivia, Cameroon, Morocco, Nicaragua, and the Philippines.

7.1 Measuring the Probability of Spurious Regression among GE, GE, and JJ

The size analysis is performed to measure the probability of spurious regression.

After running regression between independent series, if we got significant results,
it counts as spurious regression. In this analysis, we used data given above of gross
domestic product (GDP, at constant LCU) and Household Final consumption
expenditures (HFC, at constant LCU) in all cases. However, we employed regres-
sion between cross-country series to ensure the independence of the series. Suppose
the dependent variable is the GDP of Pakistan and the independent variable is HFC
of other countries. It means, we used a statistically independent series because the
HFC of one country has no relation with the GDP of any other country. After run-
ning regression, if we got significant results, it counts as spurious regression. The

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 Table 3  The Probability of Spurious Regression by using Engle and Granger (EG)Cointegration
Gross domestic product (at, constant LCU)

Household final expenditure (at, constant LCU) BGD BOL CMR IDN IND LKA MAR NIC PAK PHL
BGD 1 1 0 0 0 0 0 0 0 0
BOL 1 1 0 0 1 0 0 0 0 0
CMR 0 0 1 1 0 1 1 0 1 1
IDN 0 0 0 1 0 0 0 0 1 0
IND 1 1 0 0 1 0 0 0 0 0
LKA 0 0 0 0 0 1 1 0 1 0
MAR 0 0 0 1 0 0 1 0 1 0
Journal of Statistical Theory and Applications (2024) 23:44–66

NIC 0 0 0 0 0 0 0 1 0 0
PAK 0 0 1 1 0 1 1 0 1 0
PHL 0 1 0 0 0 0 0 0 0 1
Total 2 3 1 3 1 2 3 0 4 1

Table 3 shows the probability of spurious regression after employing the EG cointegration procedure. We used two Step procedure. In the first step, simple OLS regression
is employed and generates a residual by using the parameters of OLS regression. In a second step we tested the stationary of the residual series. If series are stationary,
it means series are cointegrated. 1’s are showing series are cointegrated and 0’s mean series are not cointegrated. Residual analysis is also employed for the validation of
results
59

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Table 4  The Probability of Spurious Regression by using Johansen and Juselius (JJ) Cointegration
Gross domestic product (at, constant LCU)

Household final expenditure (at, constant LCU) BGD BOL CMR IDN IND LKA MAR NIC PAK PHL
BGD 1 1 0 0 1 0 0 1 1 0
BOL 1 1 0 0 1 0 0 0 0 0
CMR 0 0 1 0 1 0 0 0 1 0
IDN 0 0 0 1 1 0 1 0 1 0
IND 1 1 1 1 1 0 0 0 1 1
LKA 0 1 0 0 1 1 1 0 1 0
MAR 0 0 1 0 1 0 1 0 1 1
NIC 0 0 0 0 1 0 0 1 0 1
PAK 1 0 0 0 1 0 1 0 1 0
PHL 1 0 1 0 1 0 0 0 0 1
Total 4 3 3 1 9 0 3 1 6 3

Table 4 shows the probability of spurious regression after employing the JJ cointegration procedure. We took three steps in this procedure. In the first step, VAR model is
used. In a second step, we used the lag selection criteria for lag selection. In the third step, we employed the JJ procedure and made decision based on Unrestricted Cointe-
gration Rank Test (Trace) statistics. 1’s is showing series are cointegrated and 0’s means not cointegrated. Residual analysis is also employed for validation of results
Journal of Statistical Theory and Applications (2024) 23:44–66
Journal of Statistical Theory and Applications (2024) 23:44–66 61

same procedure was done with a series of all countries to estimate the probability of
spurious regression. The results are given in the following tables:
Table 3 shows the results of the Engle and Granger cointegration test. In this
matrix “1” means the statistically independent variables are cointegrated and “0”
means variables are not cointegrated. In this analysis, we are ignoring the diagonal
1’s because these are the relationship between the same country series which means
between dependent series. After employing EG cointegration test on independent
series we got 20 significant relations out of 90 regressions. It means the probability
of spurious regression after employing the EG procedure is 22.2%. It shows a 15.2%
size distortion based on a 5% level of significance. It indicates that EG procedure is
suffering from a size distortion problem.
Table 4 demonstrates the results of Johansen and Juselius’s cointegration pro-
cedure. The “1” means the statistically independent variables are cointegrated and
“0” means the variables are not cointegrated. In this analysis we are ignoring the
diagonal 1’s because these are the relationship between the same country series
and, means between dependent series. After employing the JJ cointegration test on
independent series we got 33 significant relations out of 90 regressions. It means
the probability of spurious regression after employing the JJ procedure is 33.67%.
It shows 28.67% size distortion based on a 5% level of significance. It indicates that
the JJ procedure is suffering from a size distortion problem.
Table 5 represents the results of GE. The “1” means the statistically independent
variables are cointegrated and “0” means the variables are not cointegrated. In this
analysis we are ignoring the diagonal 1’s because these are the relationship between
the same country series and, means between dependent series. After employing
GE on an independent series, we got 7 significant relations out of 90 regressions. It
means the probability of spurious regression after employing GE is 7.78%. It shows
a 2.78% size distortion based on a 5% level of significance which is negligible.
This analysis indicates that conventional cointegration procedures EG and JJ are
suffering from a size distortion problem while GE tackles this problem by including
lag values. It means the major cause of spurious regression is missing lag dynamics
and by including the lag values, we can overcome the problem of spurious regres-
sion. It has theoretical justification, when we regress independent series, the inde-
pendent variable starts working as a proxy of the relevant variable and captures the
effect of the relevant variable which is why it becomes significant. But when we
introduce the lag value of a dependent variable as an independent variable which
is a potential determinant, it captures the effect and irrelevant variable becomes
insignificant.

7.2 Forecasting Performance of GE, EG, and JJ

The Root Mean Square Error (RMSE) has been used to compare the forecast perfor-
mance of GE, EG, and JJ. Figure 7 shows the RMSE statistics obtained after fore-
casting through these procedures:
Figure 7 shows that the forecast performance of GE is better as compared to con-
ventional EG and JJ procedures. The RMSE statistics for GE in all cases remain

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Table 5  The Probability of Spurious Regression by using Ghouse Equation (GE)
Gross domestic product (at, constant LCU)

Household final expenditure (at, constant LCU) BGD BOL CMR IDN IND LKA MAR NIC PAK PHL
BGD 1 0 0 0 0 0 0 1 1 0
BOL 1 1 0 0 0 0 0 0 0 0
CMR 0 0 1 0 0 0 0 0 1 0
IDN 0 0 0 1 0 0 0 0 0 0
IND 0 1 0 0 1 0 0 0 0 0
LKA 0 0 0 0 0 1 0 0 0 0
MAR 0 0 0 0 0 0 1 0 1 0
NIC 0 0 0 0 0 0 0 1 0 1
PAK 0 0 0 0 0 0 0 0 1 0
PHL 0 0 0 0 0 0 0 0 0 1
Total 1 1 0 0 0 0 0 1 3 1

Table 5 shows the probability of spurious regression after employing GE. We Used an F-stat to check the joint significance of lag and current values of the independent
variable. All the decisions are taken based on F-stat. 1’s is showing series are cointegrated and 0’s mean not cointegrated. Residual analysis is also employed for the vali-
dation of results
Journal of Statistical Theory and Applications (2024) 23:44–66
Journal of Statistical Theory and Applications (2024) 23:44–66 63

0.060 EG
0.055

0.050

0.045

0.040
JJ
0.035

0.030

0.025

0.020 GE

0.015
BGD BOL CMR IDN IND MAR PAK PHL LKA

Fig. 7  The Root Mean Square Error (RMSE) after Forecasting

Table 6  The results of Root Countries GE EG JJ

Mean Square Error (RMSE)
after Forecasting Bangladesh (BGD) 0.02607 0.03786 0.03027
Bolivia (BOL) 0.02450 0.01681 0.03273
Cameroon (CMR) 0.02167 0.02958 0.02704
Indonesia (IDN) 0.02818 0.05836 0.04142
India (IND) 0.03295 0.05298 0.03578
Morocco (MAR) 0.03286 0.04758 0.03869
Nicaragua (NIC) 0.04923 0.13033 0.17397
Pakistan (PAK) 0.02251 0.03491 0.02681
Philippines (PHL) 0.02415 0.02434 0.03023
Sri Lanka (LKA) 0.05140 0.05882 0.05817

smaller than the RMSE for EG and JJ procedures except only one case of Bolivia
(BOL). Figure 7 also shows that the performance of the JJ cointegration procedure
is better than the EG cointegration test. The RMSE statistics are given below in
Table 6:
Table 6 illustrates the RMSE statistics of GE, EG, and JJ procedures. These
RMSEs are calculated after forecasting. RMSE indicates the deviation of fore-
casted values from actual values. That is why the smaller value of RMSE shows
less deviation from actual values and the higher value shows higher variation. The
results in Table 6 indicate that the RMSE statistics of GE remain smaller in all cases
apart from the Bolivia (BOL) case. In the case of EG, the second row has circle
which indicates that in this particular case, EG performs well as compared to the
GE model. In other cases, GE performs better as compared to the EG. In the case
of JJ, rectangles indicte that EG performs better than the JJ procedure in only three
cases. The overall condition is that GE performs well as compared to conventional
cointegration procedures EG and JJ, and JJ cointegration procedure performs well

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as compared to EG. Based on this analysis, we can express the performance of these
procedures as:
ForecastPerformance

GE > JJ > EG
The results are theoretically admissible because GE has both contemporaneous
and lag values of the independent variables. While JJ procedure contains only lag
values of the independent variables and the EG procedure is based on static func-
tion. That is why, GE has more power to explain the relations instead of these con-
ventional procedures.
The examination of spurious regression probability and forecast performance
across the Ghouse Equation, Engle-Granger, and Johansen-Juselius methodologies
reveals compelling insights. Notably, the Ghouse Equation, grounded in the ARDL
mechanism, outperforms its counterparts in terms of size distortion, exhibiting the
least vulnerability to generating misleading results. This underscores the Ghouse
Equation’s robustness and its capacity to provide more reliable estimates. Addition-
ally, its superior forecasting ability further distinguishes it as a valuable tool in the
realm of econometrics, offering enhanced precision and accuracy to researchers and
analysts.

8 Conclusion: What All the Discussion Implies?

Huge science of unit root and cointegration analysis was developed during the last
four decades that attempts to solve the problem of spurious regression in non-sta-
tionary. However, as revealed by the Nobel laureate Clive Granger, spurious regres-
sion can exist even if there is no non-stationarity. On the other hand, the literature
days of econometrics reveal that the term was popular well before Granger and
Yule, and those early users didn’t use the term in time series context. They explored
many reasons for spurious regression and all the reasons correspond to cross-sec-
tional data. The same reasons can produce spurious regression today and surely
the solution doesn’t exist in the cointegration analysis. The Ghouse Equation is an
alternative tool to reduce the probability of spurious regression in the case of spu-
rious regression. The econometric investigation needs more serious thinking and
the care for avoiding spurious regression is necessary even if data is stationary or
cross-sectional.
Acknowledgements We Acknowledge the kind support and supervision of Prof. Dr. Ishaq Bhatti.

Author contributions AR Conceptualization and written original draft. IB supervised, edited, and
reviewed the original draft. GG collected data and analyzed the data. All authors read and approved the
final manuscript.

Funding There is no funding.

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Journal of Statistical Theory and Applications (2024) 23:44–66 65

Data availability The data is freely available on the mentioned resources. Also, can be provided on
request.

Declarations
Conflict of interest We all agree there is no competing interest.

Open Access This article is licensed under a Creative Commons Attribution 4.0 International License,
which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as
you give appropriate credit to the original author(s) and the source, provide a link to the Creative Com-
mons licence, and indicate if changes were made. The images or other third party material in this article
are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the
material. If material is not included in the article’s Creative Commons licence and your intended use is
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directly from the copyright holder. To view a copy of this licence, visit http://​creat​iveco​mmons.​org/​licen​
ses/​by/4.​0/.

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Authors and Affiliations

Ghulam Ghouse1 · Atiq Ur Rehman2 · Muhammad Ishaq Bhatti3

* Ghulam Ghouse
[email protected]
Atiq Ur Rehman
[email protected]
Muhammad Ishaq Bhatti
[email protected]
1
Department of Economics, University of Lahore, Lahore, Pakistan
2
Kashmir Institute of Economics, University of Azad Jammu and Kashmir, Azad Jammu
and Kashmir, Muzaffarabad, Pakistan
3
School of Business and Economics, Universiti Brunei Darussalam, Bandar Seri Begawan,
Brunei Darussalam

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