A new asymptotic framework is used to provide finite sample approximations for various statistics in the spurious return predictive regression analyzed by Ferson, Sarkissian, and Simin (2003a). Our theory explains all the findings of Ferson, Sarkissian, and Simin (2003a) and confirms the theoretical possibility of a spurious regression bias. The theory developed in the article has important implications with respect to existing inferential theories in predictive regressions. We also propose a simple diagnostic test to detect potential spurious regression bias in empirical analysis. The test is applied to four variants of the SP500 monthly stock returns and the six Fama-French benchmark portfolio monthly returns.

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