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Robust Specification Testing in Regression: The FRESET Test and Autocorrelated Disturbances

This study investigates the degree of size-distortion of the RESET, FRESETL and FRESETS tests, and their ability to reject falsely specified models in terms of an omitted variable, in the presence of autocorrelation. Specifically, in the presence of AR(1) and MA(1) processes, respectively. We also explore the properties of the corresponding tests when the robust error covariance matrix estimator of Newey and West (1987) is used in the construction of the tests. Our results indicated that the FRESET tests performed equally as well as, and in many cases yield higher "power" than the comparable RESET test. The dominance of the FRESET tests was even more pronounced when a Newey-West correction for autocorrelation was used as evidenced by higher rejection rates.

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Paper provided by Department of Economics, University of Victoria in its series Econometrics Working Papers with number 9806.

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Length: 13 pages
Date of creation: 27 May 1998
Date of revision:
Handle: RePEc:vic:vicewp:9806
Note: ISSN 1485-6441
Contact details of provider: Postal: PO Box 1700, STN CSC, Victoria, BC, Canada, V8W 2Y2
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  1. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  2. Mitchell, Karlyn & Onvural, Nur M, 1996. "Economies of Scale and Scope at Large Commercial Banks: Evidence from the Fourier Flexible Functional Form," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 178-99, May.
  3. Gallant, A. Ronald, 1981. "On the bias in flexible functional forms and an essentially unbiased form : The fourier flexible form," Journal of Econometrics, Elsevier, vol. 15(2), pages 211-245, February.
  4. Thursby, Jerry G, 1989. "A Comparison of Several Specification Error Tests for a General Alternative," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 217-30, February.
  5. Thursby, Jerry G, 1982. "Misspecification, Heteroscedasticity, and the Chow and Goldfeld-Quandt Tests," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 314-21, May.
  6. Porter, Richard D. & Kashyap, Anil K., 1984. "Autocorrelation and the sensitivity of reset," Economics Letters, Elsevier, vol. 14(2-3), pages 229-233.
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