Differencing as a Test of Specification

Charles I. Plosser

President, Federal Reserve Bank of Philadelphia, retired

G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

Halbert L. White

University of California, San Diego, CA

International Economic Review, 23 (October 1982) 535-552

This paper formalizes arguments presented in Plosser and Schwert [1978] by constructing a test of the hypothesis that a linear time series regression equation is well-specified. The test is based on a comparison of the least squares estimators obtained from the differenced and undifferenced regressions. The resulting specification test is similar to those proposed by Hausman [1978]. Monte Carlo experiments show that the differencing test has favorable size and power properties against errors-in-variables and omitted variables compared with Wu's [1973] instrumental variables test, Ramsey's RESET test, and the Durbin-Watson test.

Key words: Specification test, Errors-in-ariables, Omitted variables

JEL Classifications: C22

Cited 46 times in the SSCI and SCOPUS through 2020

© Copyright 1982, International Economic Review
The following file contains the reprint of this paper in Acrobat's portable data format (.pdf).

Click here to download this paper in PDF format.

Return to Publications Page

© Copyright 1998-2021, G. William Schwert

Last Updated on 6/10/2021