The effect of non-normal error terms on the properties of systemwise RESET test

Abstract

The small sample properties of the systemwise RESET test for functional misspecification is investigated using normal and non-normal error terms. When using normally distributed or less heavy tailed error terms, we find the Rao's multivariate F-test to be best among all other alternative test methods. Using the bootstrap critical values, however, all test methods perform satisfactorally in almost all situations. However, the test methods perform extremely badly (even the RAG test) when the error terms are very heavy tailed.