Stay Ahead, Stay ONMINE

Linear Regression in Time Series: Sources of Spurious Regression

1. Introduction It’s pretty clear that most of our work will be automated by AI in the future. This will be possible because many researchers and professionals are working hard to make their work available online. These contributions not only help us understand fundamental concepts but also refine AI models, ultimately freeing up time to focus on other activities. However, there is one concept that remains misunderstood, even among experts. It is spurious regression in time series analysis. This issue arises when regression models suggest strong relationships between variables, even when none exist. It is typically observed in time series regression equations that seem to have a high degree of fit — as indicated by a high R² (coefficient of multiple correlation) — but with an extremely low Durbin-Watson statistic (d), signaling strong autocorrelation in the error terms. What is particularly surprising is that almost all econometric textbooks warn about the danger of autocorrelated errors, yet this issue persists in many published papers. Granger and Newbold (1974) identified several examples. For instance, they found published equations with R² = 0.997 and the Durbin-Watson statistic (d) equal to 0.53. The most extreme found is an equation with R² = 0.999 and d = 0.093. It is especially problematic in economics and finance, where many key variables exhibit autocorrelation or serial correlation between adjacent values, particularly if the sampling interval is small, such as a week or a month, leading to misleading conclusions if not handled correctly. For example, today’s GDP is strongly correlated with the GDP of the previous quarter. Our post provides a detailed explanation of the results from Granger and Newbold (1974) and Python simulation (see section 7) replicating the key results presented in their article. Whether you’re an economist, data scientist, or analyst working with time series data, understanding this issue is crucial to ensuring your models produce meaningful results. To walk you through this paper, the next section will introduce the random walk and the ARIMA(0,1,1) process. In section 3, we will explain how Granger and Newbold (1974) describe the emergence of nonsense regressions, with examples illustrated in section 4. Finally, we’ll show how to avoid spurious regressions when working with time series data. 2. Simple presentation of a Random Walk and ARIMA(0,1,1) Process 2.1 Random Walk Let 𝐗ₜ be a time series. We say that 𝐗ₜ follows a random walk if its representation is given by: 𝐗ₜ = 𝐗ₜ₋₁ + 𝜖ₜ. (1) Where 𝜖ₜ is a white noise. It can be written as a sum of white noise, a useful form for simulation. It is a non-stationary time series because its variance depends on the time t. 2.2 ARIMA(0,1,1) Process The ARIMA(0,1,1) process is given by: 𝐗ₜ = 𝐗ₜ₋₁ + 𝜖ₜ − 𝜃 𝜖ₜ₋₁. (2) where 𝜖ₜ is a white noise. The ARIMA(0,1,1) process is non-stationary. It can be written as a sum of an independent random walk and white noise: 𝐗ₜ = 𝐗₀ + random walk + white noise. (3) This form is useful for simulation. Those non-stationary series are often employed as benchmarks against which the forecasting performance of other models is judged. 3. Random walk can lead to Nonsense Regression First, let’s recall the Linear Regression model. The linear regression model is given by: 𝐘 = 𝐗𝛽 + 𝜖. (4) Where 𝐘 is a T × 1 vector of the dependent variable, 𝛽 is a K × 1 vector of the coefficients, 𝐗 is a T × K matrix of the independent variables containing a column of ones and (K−1) columns with T observations on each of the (K−1) independent variables, which are stochastic but distributed independently of the T × 1 vector of the errors 𝜖. It is generally assumed that: 𝐄(𝜖) = 0, (5) and 𝐄(𝜖𝜖′) = 𝜎²𝐈. (6) where 𝐈 is the identity matrix. A test of the contribution of independent variables to the explanation of the dependent variable is the F-test. The null hypothesis of the test is given by: 𝐇₀: 𝛽₁ = 𝛽₂ = ⋯ = 𝛽ₖ₋₁ = 0, (7) And the statistic of the test is given by: 𝐅 = (𝐑² / (𝐊−1)) / ((1−𝐑²) / (𝐓−𝐊)). (8) where 𝐑² is the coefficient of determination. If we want to construct the statistic of the test, let’s assume that the null hypothesis is true, and one tries to fit a regression of the form (Equation 4) to the levels of an economic time series. Suppose next that these series are not stationary or are highly autocorrelated. In such a situation, the test procedure is invalid since 𝐅 in (Equation 8) is not distributed as an F-distribution under the null hypothesis (Equation 7). In fact, under the null hypothesis, the errors or residuals from (Equation 4) are given by: 𝜖ₜ = 𝐘ₜ − 𝐗𝛽₀ ; t = 1, 2, …, T. (9) And will have the same autocorrelation structure as the original series 𝐘. Some idea of the distribution problem can arise in the situation when: 𝐘ₜ = 𝛽₀ + 𝐗ₜ𝛽₁ + 𝜖ₜ. (10) Where 𝐘ₜ and 𝐗ₜ follow independent first-order autoregressive processes: 𝐘ₜ = 𝜌 𝐘ₜ₋₁ + 𝜂ₜ, and 𝐗ₜ = 𝜌* 𝐗ₜ₋₁ + 𝜈ₜ. (11) Where 𝜂ₜ and 𝜈ₜ are white noise. We know that in this case, 𝐑² is the square of the correlation between 𝐘ₜ and 𝐗ₜ. They use Kendall’s result from the article Knowles (1954), which expresses the variance of 𝐑: 𝐕𝐚𝐫(𝐑) = (1/T)* (1 + 𝜌𝜌*) / (1 − 𝜌𝜌*). (12) Since 𝐑 is constrained to lie between -1 and 1, if its variance is greater than 1/3, the distribution of 𝐑 cannot have a mode at 0. This implies that 𝜌𝜌* > (T−1) / (T+1). Thus, for example, if T = 20 and 𝜌 = 𝜌*, a distribution that is not unimodal at 0 will be obtained if 𝜌 > 0.86, and if 𝜌 = 0.9, 𝐕𝐚𝐫(𝐑) = 0.47. So the 𝐄(𝐑²) will be close to 0.47. It has been shown that when 𝜌 is close to 1, 𝐑² can be very high, suggesting a strong relationship between 𝐘ₜ and 𝐗ₜ. However, in reality, the two series are completely independent. When 𝜌 is near 1, both series behave like random walks or near-random walks. On top of that, both series are highly autocorrelated, which causes the residuals from the regression to also be strongly autocorrelated. As a result, the Durbin-Watson statistic 𝐝 will be very low. This is why a high 𝐑² in this context should never be taken as evidence of a true relationship between the two series. To explore the possibility of obtaining a spurious regression when regressing two independent random walks, a series of simulations proposed by Granger and Newbold (1974) will be conducted in the next section. 4. Simulation results using Python. In this section, we will show using simulations that using the regression model with independent random walks bias the estimation of the coefficients and the hypothesis tests of the coefficients are invalid. The Python code that will produce the results of the simulation will be presented in section 6. A regression equation proposed by Granger and Newbold (1974) is given by: 𝐘ₜ = 𝛽₀ + 𝐗ₜ𝛽₁ + 𝜖ₜ Where 𝐘ₜ and 𝐗ₜ were generated as independent random walks, each of length 50. The values 𝐒 = |𝛽̂₁| / √(𝐒𝐄̂(𝛽̂₁)), representing the statistic for testing the significance of 𝛽₁, for 100 simulations will be reported in the table below. Table 1: Regressing two independent random walks The null hypothesis of no relationship between 𝐘ₜ and 𝐗ₜ is rejected at the 5% level if 𝐒 > 2. This table shows that the null hypothesis (𝛽 = 0) is wrongly rejected in about a quarter (71 times) of all cases. This is awkward because the two variables are independent random walks, meaning there’s no actual relationship. Let’s break down why this happens. If 𝛽̂₁ / 𝐒𝐄̂ follows a 𝐍(0,1), the expected value of 𝐒, its absolute value, should be √2 / π ≈ 0.8 (√2/π is the mean of the absolute value of a standard normal distribution). However, the simulation results show an average of 4.59, meaning the estimated 𝐒 is underestimated by a factor of: 4.59 / 0.8 = 5.7 In classical statistics, we usually use a t-test threshold of around 2 to check the significance of a coefficient. However, these results show that, in this case, you would need to use a threshold of 11.4 to properly test for significance: 2 × (4.59 / 0.8) = 11.4 Interpretation: We’ve just shown that including variables that don’t belong in the model — especially random walks — can lead to completely invalid significance tests for the coefficients. To make their simulations even clearer, Granger and Newbold (1974) ran a series of regressions using variables that follow either a random walk or an ARIMA(0,1,1) process. Here is how they set up their simulations: They regressed a dependent series 𝐘ₜ on m series 𝐗ⱼ,ₜ (with j = 1, 2, …, m), varying m from 1 to 5. The dependent series 𝐘ₜ and the independent series 𝐗ⱼ,ₜ follow the same types of processes, and they tested four cases: Case 1 (Levels): 𝐘ₜ and 𝐗ⱼ,ₜ follow random walks. Case 2 (Differences): They use the first differences of the random walks, which are stationary. Case 3 (Levels): 𝐘ₜ and 𝐗ⱼ,ₜ follow ARIMA(0,1,1). Case 4 (Differences): They use the first differences of the previous ARIMA(0,1,1) processes, which are stationary. Each series has a length of 50 observations, and they ran 100 simulations for each case. All error terms are distributed as 𝐍(0,1), and the ARIMA(0,1,1) series are derived as the sum of the random walk and independent white noise. The simulation results, based on 100 replications with series of length 50, are summarized in the next table. Table 2: Regressions of a series on m independent ‘explanatory’ series. Interpretation of the results : It is seen that the probability of not rejecting the null hypothesis of no relationship between 𝐘ₜ and 𝐗ⱼ,ₜ becomes very small when m ≥ 3 when regressions are made with random walk series (rw-levels). The 𝐑² and the mean Durbin-Watson increase. Similar results are obtained when the regressions are made with ARIMA(0,1,1) series (arima-levels). When white noise series (rw-diffs) are used, classical regression analysis is valid since the error series will be white noise and least squares will be efficient. However, when the regressions are made with the differences of ARIMA(0,1,1) series (arima-diffs) or first-order moving average series MA(1) process, the null hypothesis is rejected, on average: (10 + 16 + 5 + 6 + 6) / 5 = 8.6 which is greater than 5% of the time. If your variables are random walks or close to them, and you include unnecessary variables in your regression, you will often get fallacious results. High 𝐑² and low Durbin-Watson values do not confirm a true relationship but instead indicate a likely spurious one. 5. How to avoid spurious regression in time series It’s really hard to come up with a complete list of ways to avoid spurious regressions. However, there are a few good practices you can follow to minimize the risk as much as possible. If one performs a regression analysis with time series data and finds that the residuals are strongly autocorrelated, there is a serious problem when it comes to interpreting the coefficients of the equation. To check for autocorrelation in the residuals, one can use the Durbin-Watson test or the Portmanteau test. Based on the study above, we can conclude that if a regression analysis performed with economical variables produces strongly autocorrelated residuals, meaning a low Durbin-Watson statistic, then the results of the analysis are likely to be spurious, whatever the value of the coefficient of determination R² observed. In such cases, it is important to understand where the mis-specification comes from. According to the literature, misspecification usually falls into three categories : (i) the omission of a relevant variable, (ii) the inclusion of an irrelevant variable, or (iii) autocorrelation of the errors. Most of the time, mis-specification comes from a mix of these three sources. To avoid spurious regression in a time series, several recommendations can be made: The first recommendation is to select the right macroeconomic variables that are likely to explain the dependent variable. This can be done by reviewing the literature or consulting experts in the field. The second recommendation is to stationarize the series by taking first differences. In most cases, the first differences of macroeconomic variables are stationary and still easy to interpret. For macroeconomic data, it’s strongly recommended to differentiate the series once to reduce the autocorrelation of the residuals, especially when the sample size is small. There is indeed sometimes strong serial correlation observed in these variables. A simple calculation shows that the first differences will almost always have much smaller serial correlations than the original series. The third recommendation is to use the Box-Jenkins methodology to model each macroeconomic variable individually and then search for relationships between the series by relating the residuals from each individual model. The idea here is that the Box-Jenkins process extracts the explained part of the series, leaving the residuals, which contain only what can’t be explained by the series’ own past behavior. This makes it easier to check whether these unexplained parts (residuals) are related across variables. 6. Conclusion Many econometrics textbooks warn about specification errors in regression models, but the problem still shows up in many published papers. Granger and Newbold (1974) highlighted the risk of spurious regressions, where you get a high paired with very low Durbin-Watson statistics. Using Python simulations, we showed some of the main causes of these spurious regressions, especially including variables that don’t belong in the model and are highly autocorrelated. We also demonstrated how these issues can completely distort hypothesis tests on the coefficients. Hopefully, this post will help reduce the risk of spurious regressions in future econometric analyses. 7. Appendice: Python code for simulation. #####################################################Simulation Code for table 1 ##################################################### import numpy as np import pandas as pd import statsmodels.api as sm import matplotlib.pyplot as plt np.random.seed(123) M = 100 n = 50 S = np.zeros(M) for i in range(M): #————————————————————— # Generate the data #————————————————————— espilon_y = np.random.normal(0, 1, n) espilon_x = np.random.normal(0, 1, n) Y = np.cumsum(espilon_y) X = np.cumsum(espilon_x) #————————————————————— # Fit the model #————————————————————— X = sm.add_constant(X) model = sm.OLS(Y, X).fit() #————————————————————— # Compute the statistic #—————————————————— S[i] = np.abs(model.params[1])/model.bse[1] #—————————————————— # Maximum value of S #—————————————————— S_max = int(np.ceil(max(S))) #—————————————————— # Create bins #—————————————————— bins = np.arange(0, S_max + 2, 1) #—————————————————— # Compute the histogram #—————————————————— frequency, bin_edges = np.histogram(S, bins=bins) #—————————————————— # Create a dataframe #—————————————————— df = pd.DataFrame({ “S Interval”: [f”{int(bin_edges[i])}-{int(bin_edges[i+1])}” for i in range(len(bin_edges)-1)], “Frequency”: frequency }) print(df) print(np.mean(S)) #####################################################Simulation Code for table 2 ##################################################### import numpy as np import pandas as pd import statsmodels.api as sm from statsmodels.stats.stattools import durbin_watson from tabulate import tabulate np.random.seed(1) # Pour rendre les résultats reproductibles #—————————————————— # Definition of functions #—————————————————— def generate_random_walk(T): “”” Génère une série de longueur T suivant un random walk : Y_t = Y_{t-1} + e_t, où e_t ~ N(0,1). “”” e = np.random.normal(0, 1, size=T) return np.cumsum(e) def generate_arima_0_1_1(T): “”” Génère un ARIMA(0,1,1) selon la méthode de Granger & Newbold : la série est obtenue en additionnant une marche aléatoire et un bruit blanc indépendant. “”” rw = generate_random_walk(T) wn = np.random.normal(0, 1, size=T) return rw + wn def difference(series): “”” Calcule la différence première d’une série unidimensionnelle. Retourne une série de longueur T-1. “”” return np.diff(series) #—————————————————— # Paramètres #—————————————————— T = 50 # longueur de chaque série n_sims = 100 # nombre de simulations Monte Carlo alpha = 0.05 # seuil de significativité #—————————————————— # Definition of function for simulation #—————————————————— def run_simulation_case(case_name, m_values=[1,2,3,4,5]): “”” case_name : un identifiant pour le type de génération : – ‘rw-levels’ : random walk (levels) – ‘rw-diffs’ : differences of RW (white noise) – ‘arima-levels’ : ARIMA(0,1,1) en niveaux – ‘arima-diffs’ : différences d’un ARIMA(0,1,1) = > MA(1) m_values : liste du nombre de régresseurs. Retourne un DataFrame avec pour chaque m : – % de rejets de H0 – Durbin-Watson moyen – R^2_adj moyen – % de R^2 > 0.1 “”” results = [] for m in m_values: count_reject = 0 dw_list = [] r2_adjusted_list = [] for _ in range(n_sims): #————————————– # 1) Generation of independents de Y_t and X_{j,t}. #—————————————- if case_name == ‘rw-levels’: Y = generate_random_walk(T) Xs = [generate_random_walk(T) for __ in range(m)] elif case_name == ‘rw-diffs’: # Y et X sont les différences d’un RW, i.e. ~ white noise Y_rw = generate_random_walk(T) Y = difference(Y_rw) Xs = [] for __ in range(m): X_rw = generate_random_walk(T) Xs.append(difference(X_rw)) # NB : maintenant Y et Xs ont longueur T-1 # = > ajuster T_effectif = T-1 # = > on prendra T_effectif points pour la régression elif case_name == ‘arima-levels’: Y = generate_arima_0_1_1(T) Xs = [generate_arima_0_1_1(T) for __ in range(m)] elif case_name == ‘arima-diffs’: # Différences d’un ARIMA(0,1,1) = > MA(1) Y_arima = generate_arima_0_1_1(T) Y = difference(Y_arima) Xs = [] for __ in range(m): X_arima = generate_arima_0_1_1(T) Xs.append(difference(X_arima)) # 2) Prépare les données pour la régression # Selon le cas, la longueur est T ou T-1 if case_name in [‘rw-levels’,’arima-levels’]: Y_reg = Y X_reg = np.column_stack(Xs) if m >0 else np.array([]) else: # dans les cas de différences, la longueur est T-1 Y_reg = Y X_reg = np.column_stack(Xs) if m >0 else np.array([]) # 3) Régression OLS X_with_const = sm.add_constant(X_reg) # Ajout de l’ordonnée à l’origine model = sm.OLS(Y_reg, X_with_const).fit() # 4) Test global F : H0 : tous les beta_j = 0 # On regarde si p-value < alpha if model.f_pvalue is not None and model.f_pvalue 0.7) results.append({ ‘m’: m, ‘Reject %’: reject_percent, ‘Mean DW’: dw_mean, ‘Mean R^2’: r2_mean, ‘% R^2_adj >0.7’: r2_above_0_7_percent }) return pd.DataFrame(results) #—————————————————— # Application of the simulation #—————————————————— cases = [‘rw-levels’, ‘rw-diffs’, ‘arima-levels’, ‘arima-diffs’] all_results = {} for c in cases: df_res = run_simulation_case(c, m_values=[1,2,3,4,5]) all_results[c] = df_res #—————————————————— # Store data in table #—————————————————— for case, df_res in all_results.items(): print(f”nn{case}”) print(tabulate(df_res, headers=’keys’, tablefmt=’fancy_grid’)) References Granger, Clive WJ, and Paul Newbold. 1974. “Spurious Regressions in Econometrics.” Journal of Econometrics 2 (2): 111–20. Knowles, EAG. 1954. “Exercises in Theoretical Statistics.” Oxford University Press.

1. Introduction

It’s pretty clear that most of our work will be automated by AI in the future. This will be possible because many researchers and professionals are working hard to make their work available online. These contributions not only help us understand fundamental concepts but also refine AI models, ultimately freeing up time to focus on other activities.

However, there is one concept that remains misunderstood, even among experts. It is spurious regression in time series analysis. This issue arises when regression models suggest strong relationships between variables, even when none exist. It is typically observed in time series regression equations that seem to have a high degree of fit — as indicated by a high R² (coefficient of multiple correlation) — but with an extremely low Durbin-Watson statistic (d), signaling strong autocorrelation in the error terms.

What is particularly surprising is that almost all econometric textbooks warn about the danger of autocorrelated errors, yet this issue persists in many published papers. Granger and Newbold (1974) identified several examples. For instance, they found published equations with R² = 0.997 and the Durbin-Watson statistic (d) equal to 0.53. The most extreme found is an equation with R² = 0.999 and d = 0.093.

It is especially problematic in economics and finance, where many key variables exhibit autocorrelation or serial correlation between adjacent values, particularly if the sampling interval is small, such as a week or a month, leading to misleading conclusions if not handled correctly. For example, today’s GDP is strongly correlated with the GDP of the previous quarter. Our post provides a detailed explanation of the results from Granger and Newbold (1974) and Python simulation (see section 7) replicating the key results presented in their article.

Whether you’re an economist, data scientist, or analyst working with time series data, understanding this issue is crucial to ensuring your models produce meaningful results.

To walk you through this paper, the next section will introduce the random walk and the ARIMA(0,1,1) process. In section 3, we will explain how Granger and Newbold (1974) describe the emergence of nonsense regressions, with examples illustrated in section 4. Finally, we’ll show how to avoid spurious regressions when working with time series data.

2. Simple presentation of a Random Walk and ARIMA(0,1,1) Process

2.1 Random Walk

Let 𝐗ₜ be a time series. We say that 𝐗ₜ follows a random walk if its representation is given by:

𝐗ₜ = 𝐗ₜ₋₁ + 𝜖ₜ. (1)

Where 𝜖ₜ is a white noise. It can be written as a sum of white noise, a useful form for simulation. It is a non-stationary time series because its variance depends on the time t.

2.2 ARIMA(0,1,1) Process

The ARIMA(0,1,1) process is given by:

𝐗ₜ = 𝐗ₜ₋₁ + 𝜖ₜ − 𝜃 𝜖ₜ₋₁. (2)

where 𝜖ₜ is a white noise. The ARIMA(0,1,1) process is non-stationary. It can be written as a sum of an independent random walk and white noise:

𝐗ₜ = 𝐗₀ + random walk + white noise. (3) This form is useful for simulation.

Those non-stationary series are often employed as benchmarks against which the forecasting performance of other models is judged.

3. Random walk can lead to Nonsense Regression

First, let’s recall the Linear Regression model. The linear regression model is given by:

𝐘 = 𝐗𝛽 + 𝜖. (4)

Where 𝐘 is a T × 1 vector of the dependent variable, 𝛽 is a K × 1 vector of the coefficients, 𝐗 is a T × K matrix of the independent variables containing a column of ones and (K−1) columns with T observations on each of the (K−1) independent variables, which are stochastic but distributed independently of the T × 1 vector of the errors 𝜖. It is generally assumed that:

𝐄(𝜖) = 0, (5)

and

𝐄(𝜖𝜖′) = 𝜎²𝐈. (6)

where 𝐈 is the identity matrix.

A test of the contribution of independent variables to the explanation of the dependent variable is the F-test. The null hypothesis of the test is given by:

𝐇₀: 𝛽₁ = 𝛽₂ = ⋯ = 𝛽ₖ₋₁ = 0, (7)

And the statistic of the test is given by:

𝐅 = (𝐑² / (𝐊−1)) / ((1−𝐑²) / (𝐓−𝐊)). (8)

where 𝐑² is the coefficient of determination.

If we want to construct the statistic of the test, let’s assume that the null hypothesis is true, and one tries to fit a regression of the form (Equation 4) to the levels of an economic time series. Suppose next that these series are not stationary or are highly autocorrelated. In such a situation, the test procedure is invalid since 𝐅 in (Equation 8) is not distributed as an F-distribution under the null hypothesis (Equation 7). In fact, under the null hypothesis, the errors or residuals from (Equation 4) are given by:

𝜖ₜ = 𝐘ₜ − 𝐗𝛽₀ ; t = 1, 2, …, T. (9)

And will have the same autocorrelation structure as the original series 𝐘.

Some idea of the distribution problem can arise in the situation when:

𝐘ₜ = 𝛽₀ + 𝐗ₜ𝛽₁ + 𝜖ₜ. (10)

Where 𝐘ₜ and 𝐗ₜ follow independent first-order autoregressive processes:

𝐘ₜ = 𝜌 𝐘ₜ₋₁ + 𝜂ₜ, and 𝐗ₜ = 𝜌* 𝐗ₜ₋₁ + 𝜈ₜ. (11)

Where 𝜂ₜ and 𝜈ₜ are white noise.

We know that in this case, 𝐑² is the square of the correlation between 𝐘ₜ and 𝐗ₜ. They use Kendall’s result from the article Knowles (1954), which expresses the variance of 𝐑:

𝐕𝐚𝐫(𝐑) = (1/T)* (1 + 𝜌𝜌*) / (1 − 𝜌𝜌*). (12)

Since 𝐑 is constrained to lie between -1 and 1, if its variance is greater than 1/3, the distribution of 𝐑 cannot have a mode at 0. This implies that 𝜌𝜌* > (T−1) / (T+1).

Thus, for example, if T = 20 and 𝜌 = 𝜌*, a distribution that is not unimodal at 0 will be obtained if 𝜌 > 0.86, and if 𝜌 = 0.9, 𝐕𝐚𝐫(𝐑) = 0.47. So the 𝐄(𝐑²) will be close to 0.47.

It has been shown that when 𝜌 is close to 1, 𝐑² can be very high, suggesting a strong relationship between 𝐘ₜ and 𝐗ₜ. However, in reality, the two series are completely independent. When 𝜌 is near 1, both series behave like random walks or near-random walks. On top of that, both series are highly autocorrelated, which causes the residuals from the regression to also be strongly autocorrelated. As a result, the Durbin-Watson statistic 𝐝 will be very low.

This is why a high 𝐑² in this context should never be taken as evidence of a true relationship between the two series.

To explore the possibility of obtaining a spurious regression when regressing two independent random walks, a series of simulations proposed by Granger and Newbold (1974) will be conducted in the next section.

4. Simulation results using Python.

In this section, we will show using simulations that using the regression model with independent random walks bias the estimation of the coefficients and the hypothesis tests of the coefficients are invalid. The Python code that will produce the results of the simulation will be presented in section 6.

A regression equation proposed by Granger and Newbold (1974) is given by:

𝐘ₜ = 𝛽₀ + 𝐗ₜ𝛽₁ + 𝜖ₜ

Where 𝐘ₜ and 𝐗ₜ were generated as independent random walks, each of length 50. The values 𝐒 = |𝛽̂₁| / √(𝐒𝐄̂(𝛽̂₁)), representing the statistic for testing the significance of 𝛽₁, for 100 simulations will be reported in the table below.

Table 1: Regressing two independent random walks

The null hypothesis of no relationship between 𝐘ₜ and 𝐗ₜ is rejected at the 5% level if 𝐒 > 2. This table shows that the null hypothesis (𝛽 = 0) is wrongly rejected in about a quarter (71 times) of all cases. This is awkward because the two variables are independent random walks, meaning there’s no actual relationship. Let’s break down why this happens.

If 𝛽̂₁ / 𝐒𝐄̂ follows a 𝐍(0,1), the expected value of 𝐒, its absolute value, should be √2 / π ≈ 0.8 (√2/π is the mean of the absolute value of a standard normal distribution). However, the simulation results show an average of 4.59, meaning the estimated 𝐒 is underestimated by a factor of:

4.59 / 0.8 = 5.7

In classical statistics, we usually use a t-test threshold of around 2 to check the significance of a coefficient. However, these results show that, in this case, you would need to use a threshold of 11.4 to properly test for significance:

2 × (4.59 / 0.8) = 11.4

Interpretation: We’ve just shown that including variables that don’t belong in the model — especially random walks — can lead to completely invalid significance tests for the coefficients.

To make their simulations even clearer, Granger and Newbold (1974) ran a series of regressions using variables that follow either a random walk or an ARIMA(0,1,1) process.

Here is how they set up their simulations:

They regressed a dependent series 𝐘ₜ on m series 𝐗ⱼ,ₜ (with j = 1, 2, …, m), varying m from 1 to 5. The dependent series 𝐘ₜ and the independent series 𝐗ⱼ,ₜ follow the same types of processes, and they tested four cases:

  • Case 1 (Levels): 𝐘ₜ and 𝐗ⱼ,ₜ follow random walks.
  • Case 2 (Differences): They use the first differences of the random walks, which are stationary.
  • Case 3 (Levels): 𝐘ₜ and 𝐗ⱼ,ₜ follow ARIMA(0,1,1).
  • Case 4 (Differences): They use the first differences of the previous ARIMA(0,1,1) processes, which are stationary.

Each series has a length of 50 observations, and they ran 100 simulations for each case.

All error terms are distributed as 𝐍(0,1), and the ARIMA(0,1,1) series are derived as the sum of the random walk and independent white noise. The simulation results, based on 100 replications with series of length 50, are summarized in the next table.

Table 2: Regressions of a series on m independent ‘explanatory’ series.

Interpretation of the results :

  • It is seen that the probability of not rejecting the null hypothesis of no relationship between 𝐘ₜ and 𝐗ⱼ,ₜ becomes very small when m ≥ 3 when regressions are made with random walk series (rw-levels). The 𝐑² and the mean Durbin-Watson increase. Similar results are obtained when the regressions are made with ARIMA(0,1,1) series (arima-levels).
  • When white noise series (rw-diffs) are used, classical regression analysis is valid since the error series will be white noise and least squares will be efficient.
  • However, when the regressions are made with the differences of ARIMA(0,1,1) series (arima-diffs) or first-order moving average series MA(1) process, the null hypothesis is rejected, on average:

(10 + 16 + 5 + 6 + 6) / 5 = 8.6

which is greater than 5% of the time.

If your variables are random walks or close to them, and you include unnecessary variables in your regression, you will often get fallacious results. High 𝐑² and low Durbin-Watson values do not confirm a true relationship but instead indicate a likely spurious one.

5. How to avoid spurious regression in time series

It’s really hard to come up with a complete list of ways to avoid spurious regressions. However, there are a few good practices you can follow to minimize the risk as much as possible.

If one performs a regression analysis with time series data and finds that the residuals are strongly autocorrelated, there is a serious problem when it comes to interpreting the coefficients of the equation. To check for autocorrelation in the residuals, one can use the Durbin-Watson test or the Portmanteau test.

Based on the study above, we can conclude that if a regression analysis performed with economical variables produces strongly autocorrelated residuals, meaning a low Durbin-Watson statistic, then the results of the analysis are likely to be spurious, whatever the value of the coefficient of determination R² observed.

In such cases, it is important to understand where the mis-specification comes from. According to the literature, misspecification usually falls into three categories : (i) the omission of a relevant variable, (ii) the inclusion of an irrelevant variable, or (iii) autocorrelation of the errors. Most of the time, mis-specification comes from a mix of these three sources.

To avoid spurious regression in a time series, several recommendations can be made:

  • The first recommendation is to select the right macroeconomic variables that are likely to explain the dependent variable. This can be done by reviewing the literature or consulting experts in the field.
  • The second recommendation is to stationarize the series by taking first differences. In most cases, the first differences of macroeconomic variables are stationary and still easy to interpret. For macroeconomic data, it’s strongly recommended to differentiate the series once to reduce the autocorrelation of the residuals, especially when the sample size is small. There is indeed sometimes strong serial correlation observed in these variables. A simple calculation shows that the first differences will almost always have much smaller serial correlations than the original series.
  • The third recommendation is to use the Box-Jenkins methodology to model each macroeconomic variable individually and then search for relationships between the series by relating the residuals from each individual model. The idea here is that the Box-Jenkins process extracts the explained part of the series, leaving the residuals, which contain only what can’t be explained by the series’ own past behavior. This makes it easier to check whether these unexplained parts (residuals) are related across variables.

6. Conclusion

Many econometrics textbooks warn about specification errors in regression models, but the problem still shows up in many published papers. Granger and Newbold (1974) highlighted the risk of spurious regressions, where you get a high paired with very low Durbin-Watson statistics.

Using Python simulations, we showed some of the main causes of these spurious regressions, especially including variables that don’t belong in the model and are highly autocorrelated. We also demonstrated how these issues can completely distort hypothesis tests on the coefficients.

Hopefully, this post will help reduce the risk of spurious regressions in future econometric analyses.

7. Appendice: Python code for simulation.

#####################################################Simulation Code for table 1 #####################################################

import numpy as np
import pandas as pd
import statsmodels.api as sm
import matplotlib.pyplot as plt

np.random.seed(123)
M = 100 
n = 50
S = np.zeros(M)
for i in range(M):
#---------------------------------------------------------------
# Generate the data
#---------------------------------------------------------------
    espilon_y = np.random.normal(0, 1, n)
    espilon_x = np.random.normal(0, 1, n)

    Y = np.cumsum(espilon_y)
    X = np.cumsum(espilon_x)
#---------------------------------------------------------------
# Fit the model
#---------------------------------------------------------------
    X = sm.add_constant(X)
    model = sm.OLS(Y, X).fit()
#---------------------------------------------------------------
# Compute the statistic
#------------------------------------------------------
    S[i] = np.abs(model.params[1])/model.bse[1]


#------------------------------------------------------ 
#              Maximum value of S
#------------------------------------------------------
S_max = int(np.ceil(max(S)))

#------------------------------------------------------ 
#                Create bins
#------------------------------------------------------
bins = np.arange(0, S_max + 2, 1)  

#------------------------------------------------------
#    Compute the histogram
#------------------------------------------------------
frequency, bin_edges = np.histogram(S, bins=bins)

#------------------------------------------------------
#    Create a dataframe
#------------------------------------------------------

df = pd.DataFrame({
    "S Interval": [f"{int(bin_edges[i])}-{int(bin_edges[i+1])}" for i in range(len(bin_edges)-1)],
    "Frequency": frequency
})
print(df)
print(np.mean(S))

#####################################################Simulation Code for table 2 #####################################################

import numpy as np
import pandas as pd
import statsmodels.api as sm
from statsmodels.stats.stattools import durbin_watson
from tabulate import tabulate

np.random.seed(1)  # Pour rendre les résultats reproductibles

#------------------------------------------------------
# Definition of functions
#------------------------------------------------------

def generate_random_walk(T):
    """
    Génère une série de longueur T suivant un random walk :
        Y_t = Y_{t-1} + e_t,
    où e_t ~ N(0,1).
    """
    e = np.random.normal(0, 1, size=T)
    return np.cumsum(e)

def generate_arima_0_1_1(T):
    """
    Génère un ARIMA(0,1,1) selon la méthode de Granger & Newbold :
    la série est obtenue en additionnant une marche aléatoire et un bruit blanc indépendant.
    """
    rw = generate_random_walk(T)
    wn = np.random.normal(0, 1, size=T)
    return rw + wn

def difference(series):
    """
    Calcule la différence première d'une série unidimensionnelle.
    Retourne une série de longueur T-1.
    """
    return np.diff(series)

#------------------------------------------------------
# Paramètres
#------------------------------------------------------

T = 50           # longueur de chaque série
n_sims = 100     # nombre de simulations Monte Carlo
alpha = 0.05     # seuil de significativité

#------------------------------------------------------
# Definition of function for simulation
#------------------------------------------------------

def run_simulation_case(case_name, m_values=[1,2,3,4,5]):
    """
    case_name : un identifiant pour le type de génération :
        - 'rw-levels' : random walk (levels)
        - 'rw-diffs'  : differences of RW (white noise)
        - 'arima-levels' : ARIMA(0,1,1) en niveaux
        - 'arima-diffs'  : différences d'un ARIMA(0,1,1) => MA(1)
    
    m_values : liste du nombre de régresseurs.
    
    Retourne un DataFrame avec pour chaque m :
        - % de rejets de H0
        - Durbin-Watson moyen
        - R^2_adj moyen
        - % de R^2 > 0.1
    """
    results = []
    
    for m in m_values:
        count_reject = 0
        dw_list = []
        r2_adjusted_list = []
        
        for _ in range(n_sims):
#--------------------------------------
# 1) Generation of independents de Y_t and X_{j,t}.
#----------------------------------------
            if case_name == 'rw-levels':
                Y = generate_random_walk(T)
                Xs = [generate_random_walk(T) for __ in range(m)]
            
            elif case_name == 'rw-diffs':
                # Y et X sont les différences d'un RW, i.e. ~ white noise
                Y_rw = generate_random_walk(T)
                Y = difference(Y_rw)
                Xs = []
                for __ in range(m):
                    X_rw = generate_random_walk(T)
                    Xs.append(difference(X_rw))
                # NB : maintenant Y et Xs ont longueur T-1
                # => ajuster T_effectif = T-1
                # => on prendra T_effectif points pour la régression
            
            elif case_name == 'arima-levels':
                Y = generate_arima_0_1_1(T)
                Xs = [generate_arima_0_1_1(T) for __ in range(m)]
            
            elif case_name == 'arima-diffs':
                # Différences d'un ARIMA(0,1,1) => MA(1)
                Y_arima = generate_arima_0_1_1(T)
                Y = difference(Y_arima)
                Xs = []
                for __ in range(m):
                    X_arima = generate_arima_0_1_1(T)
                    Xs.append(difference(X_arima))
            
            # 2) Prépare les données pour la régression
            #    Selon le cas, la longueur est T ou T-1
            if case_name in ['rw-levels','arima-levels']:
                Y_reg = Y
                X_reg = np.column_stack(Xs) if m>0 else np.array([])
            else:
                # dans les cas de différences, la longueur est T-1
                Y_reg = Y
                X_reg = np.column_stack(Xs) if m>0 else np.array([])
            
            # 3) Régression OLS
            X_with_const = sm.add_constant(X_reg)  # Ajout de l'ordonnée à l'origine
            model = sm.OLS(Y_reg, X_with_const).fit()
            
            # 4) Test global F : H0 : tous les beta_j = 0
            #    On regarde si p-value < alpha
            if model.f_pvalue is not None and model.f_pvalue  0.7)
        
        results.append({
            'm': m,
            'Reject %': reject_percent,
            'Mean DW': dw_mean,
            'Mean R^2': r2_mean,
            '% R^2_adj>0.7': r2_above_0_7_percent
        })
    
    return pd.DataFrame(results)
    
#------------------------------------------------------
# Application of the simulation
#------------------------------------------------------       

cases = ['rw-levels', 'rw-diffs', 'arima-levels', 'arima-diffs']
all_results = {}

for c in cases:
    df_res = run_simulation_case(c, m_values=[1,2,3,4,5])
    all_results[c] = df_res

#------------------------------------------------------
# Store data in table
#------------------------------------------------------

for case, df_res in all_results.items():
    print(f"nn{case}")
    print(tabulate(df_res, headers='keys', tablefmt='fancy_grid'))

References

  • Granger, Clive WJ, and Paul Newbold. 1974. “Spurious Regressions in Econometrics.” Journal of Econometrics 2 (2): 111–20.
  • Knowles, EAG. 1954. “Exercises in Theoretical Statistics.” Oxford University Press.
Shape
Shape
Stay Ahead

Explore More Insights

Stay ahead with more perspectives on cutting-edge power, infrastructure, energy,  bitcoin and AI solutions. Explore these articles to uncover strategies and insights shaping the future of industries.

Shape

Golar contracts CIMC Raffles for fourth FLNG

Golar LNG Ltd. last week executed an engineering, procurement, and construction (EPC) contract with Yantai CIMC Raffles Offshore Ltd. (CIMC Raffles) for its fourth floating LNG (FLNG) and second MKII design FLNG vessel with an annual liquefaction capacity of 3.5 million tonnes/year (tpy). Golar’s fourth FLNG is expected to be

Read More »

Cerebras reimagines AI cluster design with switchless CS-4 architecture

Inside the Cerebras fabric, the trade-off is different. Direct Wafer Links are proprietary, so third-party accelerators cannot be added to the fabric. Scaling it requires additional Cerebras systems, Shah said. Faruqui said the operational divide may be more significant than the physical networking challenge. Existing orchestration environments are generally designed

Read More »

IBM moves closer to fault-tolerant quantum computing at scale

“This is our first shared ultra cold environment that allows multiple chips within to be connected together, and it really provides enough space for all the high-density wiring that’s needed,” explained IBM Fellow Jerry Chow, CTO, quantum-centric supercomputing, during a media briefing. “So we’re really starting to architect the entire

Read More »

Reports: Google partnering with AMD for next-gen hybrid TPU

For AMD, meanwhile, a role in Google’s next-generation TPU program would provide another indication that its CPU and chip-design technologies are becoming relevant to the rapidly expanding custom AI accelerator market. One analyst approved of the proposed alliance. “I think it makes good sense. AMD has more than proven that they’re

Read More »

bp lets Shah Deniz compression automation contract

bp has let a contract to Emerson to deliver automation technologies for the Shah Deniz Compression project offshore Azerbaijan. Emerson will provide integrated control and safety systems aimed at enhancing production, safety, and reliability on the new offshore compression platform. The contract includes systems to provide process control, safety shutdown, fire and gas detection, and power management. Together, these systems deliver real-time visibility and remote control of critical operations, Emerson said. The $2.9 billion Shah Deniz Compression project, which includes an electrically powered, normally unattended offshore production platform, is a next stage development of the Caspian Sea Shah Deniz field. Designed to access low-pressure gas reserves and maximize overall recovery, the platform will be equipped with four 11 Mw compressors and serve as the central compression hub for gas from the Shah Deniz Alpha and Bravo platforms. The platform will operate remotely from bp’s onshore Sangachal terminal 55 km south of Baku. The project is expected to enable about 50 billion cu m of additional gas and about 25 million bbl of condensate production and export. Construction is scheduled to be completed in 2029, with first gas compression expected from the Shah Deniz Alpha platform in 2029 and from the Shah Deniz Bravo platform in 2030. The agreement follows a previous automation contract bp signed with Emerson for the Azeri Central East and Shah Deniz Stage 2 developments. bp is operator at Shah Deniz (29.99%) with partners Lukoil (19.99%), TPAO (19%), Cenub Qaz Dehlizi (16.02%), NICO (10%), and MVM (5%).

Read More »

Federal court voids Texas GulfLink license over agency’s ‘serious procedural errors’

The ruling voids the license, halting all construction or progress. Sentinel Midstream declined comment on the ruling and would not answer questions about the status of construction. GulfLink, sited about 30 miles offshore Freeport, Tex., is designed to export up to 1 million b/d via Very Large Crude Carriers (VLCCs) to the government of Japan and Freeport Commodities. The project involves a 44-mile, 42-in. OD pipeline and was scheduled to begin operations around 2028. The estimated $2.1 billion investment was funded as part of a broader trade agreement between the US and Japan. The legal battle stems from a specific rule in the Deepwater Port Act of 1974 that dictates that the federal government can only permit one crude oil deepwater port, including any supporting infrastructure, within a single designated “application area.” Because the competing SPOT project’s pipeline route physically overlaps and intersects GulfLink’s lines, the plaintiff—Citizens for Clean Air & Clean Water in Brazoria County (Better Brazoria), represented by Earthjustice—successfully argued that MARAD violated the “one port” rule when issuing GulfLink’s license in February. The three-judge panel found that MARAD “improperly drew” the map designing the project’s official boundaries to exclude the pipelines and approved two overlapping projects in the same zone instead of only licensing one. The court wrote that the scope of the error made vacatur, not the less serious remand without vacatur, the appropriate remedy. Vacatur deems the license invalid and is used when the court finds “serious procedural errors” that cannot be easily explained or fixed with minor changes. Remand without vacatur sends the decision back to the agency for corrections but leaves the current license in place in the meantime. SPOT project status The $2.5-3-billion SPOT project, developed by Enterprise Products Partners in partnership with Enbridge Inc., also lies about 30 miles from Freeport. Designed to handle VLCCs,

Read More »

IEA: Emergency reserve withdrawals slow

The International Energy Agency (IEA) member countries continued to release emergency oil stocks in July, but the pace of withdrawals slowed sharply as crude supply availability improved in parts of the Asia Pacific and the market faced increasing product tightness. IEA countries released 26 million bbl of emergency stocks in July, bringing cumulative releases to 300 million bbl since the agency announced a coordinated 400-million bbl action on Mar. 11. Government stock draws averaged 750,000 b/d in July, down from 1.5 million b/d in June and 2.5 million b/d in May. The slowdown was particularly pronounced among IEA members in Asia Oceania, which released 4 million bbl from emergency stocks in July, compared with 8 million bbl in June and 44 million bbl in May. The decline reflected improved crude oil supply availability in Japan and Korea. The US also reduced the pace of emergency stock releases. Withdrawals from the Strategic Petroleum Reserve totaled 17 million bbl in July, roughly half the volume released in June. More than 100 million bbl of the emergency stocks committed under the IEA’s 400-million bbl coordinated action has yet to reach the market. The timing of the remaining releases will depend on market developments and broader oil supply security considerations in coming months, according to the agency. Most of the remaining emergency stocks consist of crude oil, however, limiting their ability to ease increasingly tight oil product markets, IEA said. At the same time, global observed oil inventories fell sharply in July amid severely constrained shipping through the Strait of Hormuz. Stocks declined by 69 million bbl, equivalent to 2.2 million b/d, with oil on water accounting for more than 90% of the decline. Oil on water fell by 63 million bbl, or about 2 million b/d, reflecting higher arrivals and lower exports amid

Read More »

Devon takes FID on 4.5-bcfd Permian pipeline

Devon Energy Corp. has taken final investment decision (FID) on the Solitude Pipeline System, a WhiteWater-led joint venture that will build two 48-in. OD natural gas pipelines connecting the Permian basin to Katy, Tex. Devon describes Solitude as the latest in a series of steps it has taken to integrate and consolidate the infrastructure supporting its Delaware basin position. Solitude is designed for a phased build-out of 2.25 bcfd entering service second-half 2029, followed by a similarly sized second phase in 2030 and the ability to expand further to meet shipper demand. Construction and in-service timing remain subject to customary regulatory approvals. Devon has secured firm transportation capacity and will hold a 25% equity interest in the joint venture, alongside WhiteWater (50%), MPLX (10%), Diamondback Energy (7.5%) and Western Midstream Partners (7.5%). Permian producers have long absorbed volatile and periodically negative pricing at the Waha hub, where takeaway capacity has repeatedly failed to keep pace with associated gas growth. Devon says the pipeline will move the majority of its Delaware gas out of Waha and into markets that will be tied to expanding LNG export and power generation. Devon has initiated the process of securing international LNG-linked pricing, including a 100-MMcfd agreement beginning in 2027 and an additional 150 MMcfd in 2028. “Solitude is not a standalone investment; it is the next step in an integrated model we have been building for years,” said Clay Gaspar, Devon’s president and chief executive officer. “We have taken the hardest constraints in the Delaware [b]asin: water, processing, compression, takeaway and power, and have de-risked the physical constraints turning each one into a source of value rather than a tax on our returns. The company’s integrated model continues to lower our cost of supply, driving free cash flow higher and deepening our peer-leading Delaware

Read More »

JAPEX begins drilling second well for Tomakomai CCS Project

@import url(‘https://fonts.googleapis.com/css2?family=Inter:wght@100..900&display=swap’); .ebm-page__main h1, .ebm-page__main h2, .ebm-page__main h3, .ebm-page__main h4, .ebm-page__main h5, .ebm-page__main h6 { font-family: Inter; } body { line-height: 150%; letter-spacing: 0.025em; } button, .ebm-button-wrapper { font-family: Inter; } .label-style { text-transform: uppercase; color: var(–color-grey); font-weight: 600; font-size: 0.75rem; } .caption-style { font-size: 0.75rem; opacity: .6; } #onetrust-pc-sdk [id*=btn-handler], #onetrust-pc-sdk [class*=btn-handler] { background-color: #c19a06 !important; border-color: #c19a06 !important; } #onetrust-policy a, #onetrust-pc-sdk a, #ot-pc-content a { color: #c19a06 !important; } #onetrust-consent-sdk #onetrust-pc-sdk .ot-active-menu { border-color: #c19a06 !important; } #onetrust-consent-sdk #onetrust-accept-btn-handler, #onetrust-banner-sdk #onetrust-reject-all-handler, #onetrust-consent-sdk #onetrust-pc-btn-handler.cookie-setting-link { background-color: #c19a06 !important; border-color: #c19a06 !important; } #onetrust-consent-sdk .onetrust-pc-btn-handler { color: #c19a06 !important; border-color: #c19a06 !important; } Japan Petroleum Exploration (JAPEX) began drilling its second exploratory well for carbon dioxide (CO2) storage to advance the Tomakomai carbon capture and storage (CCS) project in the Tomakomai area of Hokkaido. Undertaken for drilling on Aug. 15, the well utilizes extended reach drilling from a drilling rig in Masago-cho, Tomakomai City, toward the seabed to confirm the existence of formations suitable for CO2 storage. Drilling of this second exploratory well follows start of exploratory drilling for the project in late 2025. Launched for initial study in 2023, the Tomakomai CCS project aims to separate and capture CO2 from Idemitsu Kosan Co. Ltd.’s Hokkaido refinery and Hokkaido Electric Power Co. Inc.’s Tomato Atsuma power station. The CO2 will be injected underground by JAPEX. While JAPEX said it intends to make a final investment decision (FID) on the Tomakomai CCS project based on combined results of both exploratory wells, the company did not specify a timeframe for when FID would occur. The partners previously said they intend to achieve a CO2-storage volume of 1.5-2 million tonnes/year in 2030. 

Read More »

APA efficiencies lead to lift in Permian production forecast

The leaders of APA Corp., Houston, have nudged up their 2026 forecast for oil production from the company’s US assets but kept their capital spending target level. APA’s production in the Permian basin, Egypt, and the North Sea totaled 410,000 boe/d during the second quarter, which was down from about 465,000 boe/d in the same period of last year as natural gas and international volumes, including by the company’s noncontrolling partner in Egypt, fell. Oil production in the Permian basin, where APA controls 159,000 net acres in the Delaware basin and 287,000 net acres in the Midland basin, was flat year over year at nearly 123,500, beating by 2% the estimates of chief executive officer John Christmann and his team. Speaking to analysts and investors on Aug. 6, Christmann said that APA’s drilling, completions, and field operations teams are growing more efficient and improving reliability. That, he added, is keeping the company on track for its target of saving $3.5 million per month in its operations by yearend.  It also is letting APA executives tick up their US oil production outlook to 123,000 b/d from 122,000, echoing a similar move from 3 months ago. Projected US capex for the year is still $1.3 billion. “We’ve worked on adding durability and inventory life to the Permian, where we can run flat for more than 10 years,” Christmann said. “We’re obviously exceeding that with volumes and capital efficiency that we continue to have come through.” The APA team plans to keep production in the Permian basin and Egypt relatively flat as it prepares for first oil in 2028 from the GranMorgu project offshore Suriname, in which it is a 40% partner along with TotalEnergies (40%) and Staatsolie (20%). APA is putting to work $230 million in capital there this year, with some

Read More »

Texas Tightens Oversight of Data Center Development

Texas has spent the past decade building one of the most data center-friendly policy environments in the United States. But the state’s political posture is tightening. The emerging message from Austin is that continued data center growth will face greater scrutiny over grid costs, water use, tax incentives and community impacts. What is interesting about this policy conversation is that the Texas Legislature is not in regular session. The 89th regular session ended June 2, 2025, and the 90th Legislature does not convene until January 12, 2027. What has occurred instead is a concentrated period of interim committee work, gubernatorial recommendations, implementation of Senate Bill 6, calls for a special session, and regulatory action by the Public Utility Commission of Texas and the Electric Reliability Council of Texas. Together, those efforts are creating the framework for a broader legislative debate in 2027 while already affecting projects seeking ERCOT interconnection, infrastructure costs and site-selection decisions. Abbott Sets Out a New Policy Framework The policy shift accelerated June 10, when Gov. Greg Abbott directed the PUCT to require data centers to fully fund the electric infrastructure needed to serve their operations and directed PUCT and ERCOT to identify additional actions available under existing authority. Separately, Abbott pledged to work with lawmakers in 2027 on legislation requiring data centers to add electric capacity, use water-efficient cooling systems, report electricity and water use, phase out outdated tax incentives and adopt additional protections for neighboring communities. The most consequential shift began June 10, when Gov. Greg Abbott sent state electricity regulators a sweeping list of data center policy priorities. Abbott called for future legislation requiring new facilities to add generation to the Texas grid, pay the full cost of their interconnection and related infrastructure, use closed-loop or similarly water-efficient cooling systems, and file annual reports

Read More »

NVIDIA Pushes the AI Factory From Rack to Asset Class

Making Compute Underwritable Huang expanded the argument a day later in an NVIDIA blog describing AI factory compute as an emerging investable asset class. NVIDIA’s case begins with a definition. The company does not describe its compute platform simply as a GPU. It includes accelerated computing, networking, systems software, AI frameworks and the CUDA software ecosystem surrounding the hardware. That wider platform matters to the financing thesis because NVIDIA argues it increases the number of potential users for an installed AI system. An NVIDIA DSX AI factory could support language models, vision, speech, biological computing, robotics, physical AI and other workloads. The same infrastructure could potentially move among customers, clouds or operators as demand changes. In financial terms, NVIDIA is arguing for fungibility. That could become particularly important to lenders and infrastructure investors trying to determine what happens if an original customer disappears, a contract expires or the economics of a particular workload change. A GPU cluster tied economically to one speculative tenant is one thing. Compute that can be redeployed across a large global market of clouds, enterprises, AI developers and model providers is a different risk proposition. NVIDIA contends that this breadth of potential offtakers helps protect residual value. Whether institutional markets ultimately price that risk the way NVIDIA hopes remains to be seen. But the company is now explicitly trying to establish a financial framework around that premise. Challenging the Traditional Depreciation Curve NVIDIA’s second argument is that software can extend the economic life of installed hardware. CUDA is central to that case. The company maintains that successive software improvements can increase the performance and efficiency of systems that have already been deployed, allowing the same hardware to produce more useful work at lower cost over time. That does not eliminate hardware obsolescence. New GPU generations continue

Read More »

The Next Data Center Constraint: Trust

When Facts Aren’t Enough Few places offer a more revealing test case than Loudoun County, Virginia. Data Center Alley has spent decades living with data center development at a scale most emerging markets will never approach. Rizer said Loudoun’s experience gives the county an unusually deep record with which to answer questions about environmental impacts, infrastructure and economic benefits. But those facts increasingly struggle to penetrate the broader public debate. Rizer said Loudoun today has more than 250 data centers, while the entire sector uses less than 10% of the county water system. He also pointed to improved air quality over the past decade and approximately $1.2 billion in tax revenue from the industry. Yet he acknowledged that simply producing another data point does little good when residents no longer trust the people presenting it. “I call it community concern whack-a-mole, because every time you address one thing, there are three others that pop up,” Rizer said. The problem, in his view, has become partly emotional rather than informational. “You can’t change how people think until you change how they feel,” he said. “And right now they feel angry, they feel confused, they are fearful, they are mistrustful, both of government and the big tech industry.” That distinction matters. The industry’s instinct has often been to counter criticism with facts: tax receipts, job numbers, water-use calculations, emissions data or explanations of how a particular cooling system works. Those facts remain important. But Rizer’s argument is that the industry must first rebuild enough credibility for communities to hear them. The Industry’s Unforced Errors Not all of the distrust has arrived from outside the industry. Rizer and Waitkunas were equally pointed about mistakes by developers and operators that have given opponents powerful examples to use against data center projects elsewhere. “The industry

Read More »

Reports: Data Center Expansion Finds Its Contours

AI Density Is Arriving Unevenly Inside the data center, the AI transition remains equally uneven. Uptime’s 2026 survey found the average modal, or most common, rack density across respondents exceeding 11 kW for the first time, up from 9 kW in 2025. But that number requires context. A relatively small group of very high-density facilities pulls the average upward. Without those facilities, Uptime puts average modal rack density at 7.8 kW, only modestly higher than 7.5 kW in 2025. The industry therefore continues to operate two realities at once: a vast installed base running conventional rack densities and a rapidly emerging class of AI facilities pushing far beyond them. The latter is becoming more visible. Some 24% of Uptime respondents now report racks at 30 kW or higher, up from 19% last year. Much of the increase occurred above 50 kW, and some operators reported deployments exceeding 100 kW. Still, most surveyed facilities have no racks at 30 kW or above. AI inference is also moving up the density curve. For the first time in Uptime’s survey, generative AI inference matched AI training as a driver of respondents’ highest-density deployments, with 21% citing each workload. That matters because inference potentially pushes AI infrastructure requirements beyond a relatively concentrated population of model-training campuses and into a broader set of facilities and markets. Power Is Both Constraint and Risk No issue connects the three reports more consistently than power. It limits new site availability. It redirects development toward emerging markets. It shapes community debates. It affects density and cooling architecture. And once a facility is operating, it remains the largest source of outage risk. Uptime says 56% of operators who experienced an impactful outage identified power as the primary cause of their most recent incident. The institute cautions against treating the increase

Read More »

DCF Poll: What Will Constrain Data Center Growth Next?

Matt Vincent is Editor in Chief of Data Center Frontier, where he leads editorial strategy and coverage focused on the infrastructure powering cloud computing, artificial intelligence, and the digital economy. A veteran B2B technology journalist with more than two decades of experience, Vincent specializes in the intersection of data centers, power, cooling, and emerging AI-era infrastructure. Since assuming the EIC role in 2023, he has helped guide Data Center Frontier’s coverage of the industry’s transition into the gigawatt-scale AI era, with a focus on hyperscale development, behind-the-meter power strategies, liquid cooling architectures, and the evolving energy demands of high-density compute, while working closely with the Digital Infrastructure Group at Endeavor Business Media to expand the brand’s analytical and multimedia footprint. Vincent also hosts The Data Center Frontier Show podcast, where he interviews industry leaders across hyperscale, colocation, utilities, and the data center supply chain to examine the technologies and business models reshaping digital infrastructure. Since its inception he serves as Head of Content for the Data Center Frontier Trends Summit. Before becoming Editor in Chief, he served in multiple senior editorial roles across Endeavor Business Media’s digital infrastructure portfolio, with coverage spanning data centers and hyperscale infrastructure, structured cabling and networking, telecom and datacom, IP physical security, and wireless and Pro AV markets. He began his career in 2005 within PennWell’s Advanced Technology Division and later held senior editorial positions supporting brands such as Cabling Installation & Maintenance, Lightwave Online, Broadband Technology Report, and Smart Buildings Technology. Vincent is a frequent moderator, interviewer, and keynote speaker at industry events including the HPC Forum, where he delivers forward-looking analysis on how AI and high-performance computing are reshaping digital infrastructure. He graduated with honors from Indiana University Bloomington with a B.A. in English Literature and Creative Writing and lives in southern New Hampshire with

Read More »

Is your networking built for AI’s traffic patterns and data volumes?

As data centers evolve into AI factories, compute has shifted from a cost center to a revenue driver. “Compute is revenue,” said Jensen Huang, co-founder and CEO of NVIDIA. “Without compute, there is no way to generate tokens. Without tokens, there’s no way to generate revenue. So, in this new world of AI, compute equals revenue.” This reframe changes an organizations’ calculus. If compute is revenue, what do you optimize for? Here are 5 questions to consider: Are you measuring what actually drives AI factory revenue? Most AI factories are power-constrained, so tokens per watt dictate how much revenue you can generate and the cost per token impacts the AI factory profit margin. But neither of these metrics should be evaluated at a single operating point. Batch jobs, real-time chat, and agentic workloads demand different points on the throughput-latency curve. AI chips that perform well at only a few points will underserve the full range of workloads. Additional key operational metrics like time to first token (TTFT), mean time between interruptions (MTBI), and platform useful life are the bedrock of AI factory efficiency. They dictate how quickly an AI factory comes online to generate tokens, the reliability of its revenue streams, and its long-term ability to remain productive as AI workloads evolve. How does agentic AI change what your CPU needs to deliver? Data center CPUs have historically been optimized for parallel throughput, where more cores improve aggregate capacity.  Agentic workloads run in loops and make different demands. The model reasons on the GPU, the CPU executes tool calls such as code compilation and data retrieval, and the result returns to the GPU so the model can reason again. Every step runs in sequence, gated by the one before it. Per-core performance and memory latency determine how fast each step

Read More »

Microsoft will invest $80B in AI data centers in fiscal 2025

And Microsoft isn’t the only one that is ramping up its investments into AI-enabled data centers. Rival cloud service providers are all investing in either upgrading or opening new data centers to capture a larger chunk of business from developers and users of large language models (LLMs).  In a report published in October 2024, Bloomberg Intelligence estimated that demand for generative AI would push Microsoft, AWS, Google, Oracle, Meta, and Apple would between them devote $200 billion to capex in 2025, up from $110 billion in 2023. Microsoft is one of the biggest spenders, followed closely by Google and AWS, Bloomberg Intelligence said. Its estimate of Microsoft’s capital spending on AI, at $62.4 billion for calendar 2025, is lower than Smith’s claim that the company will invest $80 billion in the fiscal year to June 30, 2025. Both figures, though, are way higher than Microsoft’s 2020 capital expenditure of “just” $17.6 billion. The majority of the increased spending is tied to cloud services and the expansion of AI infrastructure needed to provide compute capacity for OpenAI workloads. Separately, last October Amazon CEO Andy Jassy said his company planned total capex spend of $75 billion in 2024 and even more in 2025, with much of it going to AWS, its cloud computing division.

Read More »

John Deere unveils more autonomous farm machines to address skill labor shortage

Join our daily and weekly newsletters for the latest updates and exclusive content on industry-leading AI coverage. Learn More Self-driving tractors might be the path to self-driving cars. John Deere has revealed a new line of autonomous machines and tech across agriculture, construction and commercial landscaping. The Moline, Illinois-based John Deere has been in business for 187 years, yet it’s been a regular as a non-tech company showing off technology at the big tech trade show in Las Vegas and is back at CES 2025 with more autonomous tractors and other vehicles. This is not something we usually cover, but John Deere has a lot of data that is interesting in the big picture of tech. The message from the company is that there aren’t enough skilled farm laborers to do the work that its customers need. It’s been a challenge for most of the last two decades, said Jahmy Hindman, CTO at John Deere, in a briefing. Much of the tech will come this fall and after that. He noted that the average farmer in the U.S. is over 58 and works 12 to 18 hours a day to grow food for us. And he said the American Farm Bureau Federation estimates there are roughly 2.4 million farm jobs that need to be filled annually; and the agricultural work force continues to shrink. (This is my hint to the anti-immigration crowd). John Deere’s autonomous 9RX Tractor. Farmers can oversee it using an app. While each of these industries experiences their own set of challenges, a commonality across all is skilled labor availability. In construction, about 80% percent of contractors struggle to find skilled labor. And in commercial landscaping, 86% of landscaping business owners can’t find labor to fill open positions, he said. “They have to figure out how to do

Read More »

2025 playbook for enterprise AI success, from agents to evals

Join our daily and weekly newsletters for the latest updates and exclusive content on industry-leading AI coverage. Learn More 2025 is poised to be a pivotal year for enterprise AI. The past year has seen rapid innovation, and this year will see the same. This has made it more critical than ever to revisit your AI strategy to stay competitive and create value for your customers. From scaling AI agents to optimizing costs, here are the five critical areas enterprises should prioritize for their AI strategy this year. 1. Agents: the next generation of automation AI agents are no longer theoretical. In 2025, they’re indispensable tools for enterprises looking to streamline operations and enhance customer interactions. Unlike traditional software, agents powered by large language models (LLMs) can make nuanced decisions, navigate complex multi-step tasks, and integrate seamlessly with tools and APIs. At the start of 2024, agents were not ready for prime time, making frustrating mistakes like hallucinating URLs. They started getting better as frontier large language models themselves improved. “Let me put it this way,” said Sam Witteveen, cofounder of Red Dragon, a company that develops agents for companies, and that recently reviewed the 48 agents it built last year. “Interestingly, the ones that we built at the start of the year, a lot of those worked way better at the end of the year just because the models got better.” Witteveen shared this in the video podcast we filmed to discuss these five big trends in detail. Models are getting better and hallucinating less, and they’re also being trained to do agentic tasks. Another feature that the model providers are researching is a way to use the LLM as a judge, and as models get cheaper (something we’ll cover below), companies can use three or more models to

Read More »

OpenAI’s red teaming innovations define new essentials for security leaders in the AI era

Join our daily and weekly newsletters for the latest updates and exclusive content on industry-leading AI coverage. Learn More OpenAI has taken a more aggressive approach to red teaming than its AI competitors, demonstrating its security teams’ advanced capabilities in two areas: multi-step reinforcement and external red teaming. OpenAI recently released two papers that set a new competitive standard for improving the quality, reliability and safety of AI models in these two techniques and more. The first paper, “OpenAI’s Approach to External Red Teaming for AI Models and Systems,” reports that specialized teams outside the company have proven effective in uncovering vulnerabilities that might otherwise have made it into a released model because in-house testing techniques may have missed them. In the second paper, “Diverse and Effective Red Teaming with Auto-Generated Rewards and Multi-Step Reinforcement Learning,” OpenAI introduces an automated framework that relies on iterative reinforcement learning to generate a broad spectrum of novel, wide-ranging attacks. Going all-in on red teaming pays practical, competitive dividends It’s encouraging to see competitive intensity in red teaming growing among AI companies. When Anthropic released its AI red team guidelines in June of last year, it joined AI providers including Google, Microsoft, Nvidia, OpenAI, and even the U.S.’s National Institute of Standards and Technology (NIST), which all had released red teaming frameworks. Investing heavily in red teaming yields tangible benefits for security leaders in any organization. OpenAI’s paper on external red teaming provides a detailed analysis of how the company strives to create specialized external teams that include cybersecurity and subject matter experts. The goal is to see if knowledgeable external teams can defeat models’ security perimeters and find gaps in their security, biases and controls that prompt-based testing couldn’t find. What makes OpenAI’s recent papers noteworthy is how well they define using human-in-the-middle

Read More »