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The sensitivity of the RESET tests to disturbance autocorrelation in regression analysis

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Author Info

  • Siu Fai Leung

    ()
    (Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

  • Shihti Yu

    (Department of Finance, National Chung Hsing University, No. 250, Kuo Kuang Road, Taichung, Taiwan)

Abstract

This paper investigates the sensitivity of the RESET tests, proposed by Ramsey (1969) and modified by Thursby and Schmidt (1977), to disturbance autocorrelation in regression analysis. Porter and Kashyap (1984) show that RESET is not robust to autocorrelated disturbance when there is a highly autocorrelated regressor in the model. We show that RESET is sensitive to disturbance autocorrelation even when the regressors are not autocorrelated. We explain the findings of Thursby (1979) and Porter and Kashyap (1984) as well as our result by showing that a spurious correlation between the regressor and the disturbance is responsible for the serious size distortion of the RESET tests.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 26 (2001)
Issue (Month): 4 ()
Pages: 721-726

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Handle: RePEc:spr:empeco:v:26:y:2001:i:4:p:721-726

Note: received: June 1999/Final version received: November 2000
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Related research

Keywords: RESET; Autocorrelation; Spurious Relationship; Monte Carlo Simulation.;

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Cited by:
  1. Seung Hyun Hong & Peter C. B. Phillips, 2005. "Testing Linearity in Cointegrating Relations with an Application to Purchasing Power Parity," Cowles Foundation Discussion Papers 1541, Cowles Foundation for Research in Economics, Yale University.
  2. Andrea Vaona, 2010. "Spatial autocorrelation and the sensitivity of RESET: a simulation study," Journal of Geographical Systems, Springer, vol. 12(1), pages 89-103, March.
  3. Young-Sook Lee & Tae-Hwan Kim & Paul Newbold, 2004. "Spurious Nonlinear Regressions In Econometrics," Royal Economic Society Annual Conference 2004 27, Royal Economic Society.
  4. Andrea Vaona, 2008. "Inflation persistence, structural breaks and omitted variables: a critical view," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0802, USI Università della Svizzera italiana.
  5. Andrea Vaona, 2008. "The sensitivity of nonparametric misspecification tests to disturbance autocorrelation," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0803, USI Università della Svizzera italiana.
  6. MacDonald, Peter, 2013. "Labour substitution and the scope for military outsourcing," MPRA Paper 46688, University Library of Munich, Germany.
  7. repec:ebl:ecbull:v:3:y:2005:i:56:p:1-4 is not listed on IDEAS

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