The effect of fat-tailed error terms on the properties of systemwise RESET test

Mahdi Alkhamisi, Ghadban Khalaf and Ghazi Shukur

Journal of Applied Statistics, 2008, vol. 35, issue 1, 101-113

Abstract: The small sample properties of the systemwise RESET (Regression Specification Error Test) test for functional misspecification are investigated using normal and non-normal error terms. When using normally distributed or less heavy tailed error terms, we find the Rao's multivariate F-test to be best among all other alternative test methods (i.e. Wald, Lagrange Multiplier and Likelihood Ratio). Using the bootstrap critical values, however, all test methods perform satisfactorily in almost all situations. However, the test methods perform extremely badly (even the RAO test) when the error terms are very heavy tailed.

Keywords: systemwise test of functional misspecification; non-normal error terms; small sample properties (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/02664760701683676

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