Abstract
We produce Monte Carlo evidence on the size and power of the RESET, a heteroscedasticity test, and a test for autocorrelation applied to realistic distributed-lag models. We find that the autocorrelation test has the correct size and high power to detect not only autocorrelation (given a correct model), but also the erroneous omission of several lags of an explanatory variable, whereas the RESET and heteroscedasticity tests are oversized in the presence of positive disturbance autocorrelation, especially when the regressors are also positively autocorrelated, and have no power to detect such misspecification errors. In large samples, size distortion may be avoided by using autocorrelation-robust methods.
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Notes
We use the LINUX version of RATS v. 5.01 to carry out the simulations. Random numbers were generated using the function %RAN(x) and the starting seed 317811. Note also that before we started drawing the values of ɛ 1, ɛ 2, and w, we let the process run for 500 “periods.”
All the tables not reported here are available upon request.
In the first version of the paper, we only considered the omission of four lags of X 1t . We thank an anonymous referee of this journal for suggesting a generalization, so as to avoid conclusions that depend on a specific model.
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We gratefully acknowledge the constructive comments of an anonymous referee of this journal, which improved significantly the paper. We also thank our colleagues S. Symeonides and E. Zacharias for their comments. The usual disclaimer applies.
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Hatzinikolaou, D., Stavrakoudis, A. Empirical size and power of some diagnostic tests applied to a distributed lag model. Empirical Economics 31, 631–643 (2006). https://doi.org/10.1007/s00181-005-0039-0
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DOI: https://doi.org/10.1007/s00181-005-0039-0