Spurious deterministic seasonality and autocorrelation corrections with quarterly data: Further Monte Carlo results

Abstract.

Following recent work of Franses, Hylleberg and Lee (FHL), this paper analyses the consequences of fitting a deterministic seasonal model to a quarterly time series which can be (at least approximately) described by a seasonal unit root(s) model. Besides the distribution of the coefficient of determination, the empirical distributions of two commonly used statistics are also investigated through Monte Carlo experiments for small, moderately large and large samples. FHL's work is also extended allowing the possibility of residual autocorrelation corrections. The main conclusion that emerges from the results is that one should not try to measure the importance of deterministic seasonality nor test for its presence in the context of such (static) regression models, even when using some form of residual autocorrelation correction. A simple empirical application is provided to illustrate our results.