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Using HP Filtered Data for Econometric Analysis: Some Evidence from Monte Carlo Simulations

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  • Mark Meyer
  • Peter Winker*

Abstract

The Hodrick-Prescott (HP) filter has become a widely used tool for detrending integrated time series in applied econometric analysis. Even though the theoretical time series literature sums up an extensive catalogue of severe criticism against an econometric analysis of HP filtered data, the original Hodrick and Prescott (1980, 1997) suggestion to measure the strength of association between (macro-)economic variables by a regression analysis of corresponding HP filtered time series still appears to be popular. A contradictory situation which might be justified only if HP induced distortions were quantitatively negligible in empirical applications. However, this hypothesis can hardly be maintained as the simulation results presented within this paper indicate that HP filtered series give seriously rise to spurious regression results.
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  • Mark Meyer & Peter Winker*, 2005. "Using HP Filtered Data for Econometric Analysis: Some Evidence from Monte Carlo Simulations," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 89(3), pages 303-320, August.
    • Handle: RePEc:spr:alstar:v:89:y:2005:i:3:p:303-320
    DOI: 10.1007/s10182-005-0206-9
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    5. Michael Artis & Toshihiro Okubo, 2011. "The intranational business cycle in Japan," Oxford Economic Papers, Oxford University Press, vol. 63(1), pages 111-133, January.
    6. Flaig Gebhard, 2015. "Why We Should Use High Values for the Smoothing Parameter of the Hodrick-Prescott Filter," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 235(6), pages 518-538, December.
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    9. Michele Piffer & Maximilian Podstawski, 2018. "Identifying Uncertainty Shocks Using the Price of Gold," Economic Journal, Royal Economic Society, vol. 128(616), pages 3266-3284, December.
    10. Gunter Löffler, 2013. "Can rating agencies look through the cycle?," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 623-646, May.
    11. João Sousa Andrade & António Portugal Duarte, 2012. "The Importance of a Good Indicator for Global Exciess Demand," Book Chapters, in: Paulino Teixeira & António Portugal Duarte & Srdjan Redzepagic & Dejan Eric (ed.), European Integration Process in Western Balkan Countries, edition 1, volume 1, chapter 1, pages 11-35, Institute of Economic Sciences.
    12. Justyna Wr'oblewska, 2020. "Bayesian analysis of seasonally cointegrated VAR model," Papers 2012.14820, arXiv.org, revised Apr 2021.
    13. Artis, Michael & Okubo, Toshihiro, 2009. "Globalization and business cycle transmission," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 91-99, August.
    14. João Sousa Andrade & António Portugal Duarte, 2014. "Output-gaps in the PIIGS Economies: An Ingredient of a Greek Tragedy," GEMF Working Papers 2014-06, GEMF, Faculty of Economics, University of Coimbra.
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    16. Andreas Brunhart, 2017. "Are Microstates Necessarily Led by Their Bigger Neighbors’ Business Cycle? The Case of Liechtenstein and Switzerland," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 13(1), pages 29-52, May.
    17. João Sousa Andrade & António Portugal Duarte, 2014. "Output-gaps in the PIIGS Economies: An Ingredient of a Greek Tragedy," GEMF Working Papers 2014-06, GEMF, Faculty of Economics, University of Coimbra.
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    More about this item

    Keywords

    HP filter; spurious regression; detrending; JEL C15; C22;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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