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

Author

Listed:
  • 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.

Suggested Citation

  • Siu Fai Leung & Shihti Yu, 2001. "The sensitivity of the RESET tests to disturbance autocorrelation in regression analysis," Empirical Economics, Springer, vol. 26(4), pages 721-726.
  • 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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    Citations

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    Cited by:

    1. MacDonald, Peter, 2013. "Labour substitution and the scope for military outsourcing," MPRA Paper 46688, University Library of Munich, Germany.
    2. 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.
    3. Hong, Seung Hyun & Phillips, Peter C. B., 2010. "Testing Linearity in Cointegrating Relations With an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(1), pages 96-114.
    4. Giovanni Millo, 2016. "The Income Elasticity of Nonlife Insurance: A Reassessment," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 335-362, June.
    5. 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.
    6. Lee, Young-Sook & Kim, Tae-Hwan & Newbold, Paul, 2005. "Spurious nonlinear regressions in econometrics," Economics Letters, Elsevier, vol. 87(3), pages 301-306, June.
    7. repec:ebl:ecbull:v:3:y:2005:i:56:p:1-4 is not listed on IDEAS
    8. 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.

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