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

Siu Leung () and Shih-Ti Yu

Empirical Economics, 2001, vol. 26, issue 4, 726 pages

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.

Keywords: RESET; Autocorrelation; Spurious Relationship; Monte Carlo Simulation. (search for similar items in EconPapers)
Date: 2001-12-05
Note: received: June 1999/Final version received: November 2000
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