Which of the following statements concerning the variables in a regression analy

Question

Which of the following statements concerning the variables in a regression analysis is true?

a. If the variables are difference-stationary, then we should always estimate a relationship between the first-differenced series.

b. If the variables are I(1) and cointegrated, then we should first de-trend the series and then perform regression analysis on the de-trended variables.

c. If the variables are trend-stationary, then we should estimate a regression model that includes a trend variable.

d. all of the above.

e. none of the above.

Explanation / Answer

all of the above statements are true, that is, when the variables are difference-stationary, then we should always estimate a relationship between the first-differenced series, secondly when the variables are I(1) and cointegrated, then we should first de-trend the series and then perform regression analysis on the de-trended variables and lastly when the variables are trend-stationary, then we should estimate a regression model that includes a trend variable.

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