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Interpretation RESET-Test: Problems with different test options


From   [email protected]
To   [email protected]
Subject   Interpretation RESET-Test: Problems with different test options
Date   Wed, 17 Nov 2010 10:43:08 +0100

Dear STATA community,

in order to test for specification errors I use the RESET-test. I 
understand that RESET is not a test for omitted variables but more a test 
looking for non-linearities.
I have two problems as to the interpretation of my results:

1. There is a striking difference of the RESET test using powers of the 
fitted values of the dependent variable (default-option) and using powers 
of the independent variables (rhs-option). In the first case with my data 
set the Ho has to be rejected (5%-level). In the second case the Ho can 
not be rejected even at the 40%-level. For sure this has something to do 
with a difference of the dependent and independet variables but is there 
any precise explanation as to this difference? 

2. I run a multiple regression. The RESET-test (default-option) does not 
reject the Ho of correct specification (10% level). I run a regression 
with the same dependent variable and the same independent variables but in 
addition I include one other independent variable: Now the RESET-test 
(default-option) rejects the Ho of correct specification. To my opinion 
including additional variables should reduce the probability of omitting 
variables and neglecting non-linearities. 

In advance many thanks for any suggestions.

Matthias 


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