Home » Eng Finance » R » Ramsey regression equation specification error test (RESET)

Ramsey regression equation specification error test (RESET)

A general specification test for a linear regression model. It tests whether non-linear combinations of explanatory variables, in particulcir, their powers, help explain the dependent variable. The test is performed by regressing the predicted value of the dependent variable, y, on the explanatory variables as well as the powers of y, and then testing the joint significance of the coefficients on the latter. If these are significant, the linear model is misspecified.

Reference: Oxford Press Dictonary of Economics, 5th edt.