Differencing as a Test of Specification
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 
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 .
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  instrumental variables test, Ramsey's RESET test, and the
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
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