Differencing as a Test of Specification


Charles I. Plosser

President, Federal Reserve Bank of Philaadelphia,
and University of Rochester, Rochester, NY 14627


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 44 times in the SSCI and SCOPUS through 2016

© Copyright 1982, International Economic Review
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