Publication Type
Journal Article
Version
acceptedVersion
Publication Date
1-2010
Abstract
This article shows that when applied to nonstationary time series, the conventional Regression Error Specification Test (RESET) leads to severe size distortion and its asymptotic distribution involves a mixture of noncentral chi(2) distributions. Nonstationarity introduces bias terms in the limit distribution, and appropriate corrections for the bias are presented leading to a modified RESET test that has a central chi(2) limit distribution. In simulations, this modified test is shown to have power not only against nonlinear cointegration but also against the absence of cointegration. In an empirical illustration, the linear purchasing power parity (PPP) specification is tested using five Organization for Economic Cooperation and Development (OECD) countries.
Keywords
Noncentral chi(2) distribution, Nonlinear cointegration, RESET test, Specification test
Discipline
Econometrics
Research Areas
Econometrics
Publication
Journal of Business and Economic Statistics
Volume
28
Issue
1
First Page
96
Last Page
114
ISSN
0735-0015
Identifier
10.1198/jbes.2009.07182
Publisher
Taylor & Francis: SSH Journals
Citation
HONG, Seong Hyun and Peter C. B. PHILLIPS.
Testing Linearity in Cointegrating Relations With an Application to Purchasing Power Parity. (2010). Journal of Business and Economic Statistics. 28, (1), 96-114.
Available at: https://ink.library.smu.edu.sg/soe_research/1812
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1198/jbes.2009.07182