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RE: st: ivreset

From   Arne Risa Hole <>
Subject   RE: st: ivreset
Date   18 Mar 2006 11:42:50 +0000

Austin, Mark,

Thank you both for your replies, rescaling the forecast did the trick (sorry for the bad formatting of my code before, it looked fine in my email programme).

I understand the motivation behind the rescaling, but Im slightly concerned about the fact that it produces a different test statistic compared to using the actual forecast. Note that this is not the case when using the Reset test following OLS the test statistic is invariant to the rescaling in this case.

I would think that since the two approaches (rescaling/ no rescaling) produce different results, the correct test statistic is that using the actual forecast?

Cheers Arne

On Mar 17 2006, Schaffer, Mark E wrote:

Austin, Arne,

> -----Original Message-----
> From: Austin Nichols [] > Sent: 16 March 2006 23:30
> To:
> Subject: Re: st: ivreset
> > -findit ivreset- then -help ivreset- when installed has a > excellent exposition that begins:
> > As Pagan and Hall (1983) and Pesaran and Taylor (1999) point > out, a RESET test for an IV regression cannot use the > standard IV predicted values X*beta-hat, because X includes > endogenous regressors that are correlated with u.
> > Try this code instead:
> > use
> qui ivreg2 lw s expr tenure rns smsa (iq=med kww)
> predict ytilde
> mat b=e(b)
> mat li b
> qui regress iq s expr tenure rns smsa med kww
> qui predict double xh
> gen yhat=ytil-b[1,1]*iq+b[1,1]*xh
> sum yhat, meanonly
> qui replace yhat = (yhat-r(min))/(r(max)-r(min))
> qui gen double yhat2=yhat^2
> qui ivreg2 lw s expr tenure rns smsa yhat2 (iq=med kww)
> test yhat2
> qui ivreg2 lw s expr tenure rns smsa (iq=med kww)
> ivreset
> > Now, as to why
> replace yhat = (yhat-r(min))/(r(max)-r(min))
> I cannot tell you, but it's in ivreset.ado

It's to rescale yhat so that when it's squared, cubed, etc., it doesn't
get wildly out of scale relative to the other regressors. This can
cause problems for the regression that includes these terms.


> On 16 Mar 2006 19:10:13 +0000, Arne Risa Hole wrote:
> > I am using ivreset to do a Pesaran-Taylor Reset test after ivreg2. > > However, I am not able to replicate the result from ivreset > manually. For example:
> >
> > use
> >
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