The sensitivity of the RESET tests to disturbance autocorrelation in regression analysis |
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| Authors: | Siu Fai Leung Shihti Yu |
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| Institution: | (1) Department of Economics, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong (E-mail: sfleung@ust.hk), CN;(2) Department of Finance, National Chung Hsing University, No. 250, Kuo Kuang Road, Taichung, Taiwan, TW |
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| 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.
First version received: June 1999/Final version received: November 2000 |
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| Keywords: | : RESET Autocorrelation Spurious Relationship Monte Carlo Simulation |
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