Working Paper
Missing Variation in the Great Moderation: Lack of Signal Error and OLS Regression
Nalewaik, Jeremy J. (2014-04-07)
This paper studies measurement errors that subtract signal from true variables of interest, labeled lack of signal errors (LoSE). The effect on OLS regression of LoSE is opposite the conventional wisdom about classical measurement errors, with LoSE in the dependent variable, not the explanatory variables, causing attenuation bias under some conditions. The paper provides evidence of LoSE in US GDP growth during the period known as the Great Moderation (roughly the mid-1980s to the mid-2000s), illustrating attenuation bias in regressions of GDP growth on asset prices. These biases may have ...
Finance and Economics Discussion Series , Paper 2014-27