G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

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Journal of Econometrics, 6 (September 1977) 199-224

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The effect of differencing all of the variables in a properly specified regression equation is examined. Excessive use of the difference transformation induces a non-invertible moving average (MA) process in the disturbances of the transformed regression. Monte Carlo technniques are used to examine the effects of overdifferencing on the efficiency of regression parameter estimates, inferences based on those estimates, and tests for overdifferencing based on the estimator of the MA parameter for the disturbances of the differences regression. Overall, the problem of overdifferencing is not serious if careful attention is paid to the properties of the disturbances of the regression equations.

Key words: Overdifferencing, ARIMA, Unit root

JEL Classifications: C22

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Cited 81 times in the SSCI and SCOPUS through 2020

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© Copyright 1977, Elsevier

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