Specification (regression)
In regression analysis specification is the process of developing a regression model. This process consists of selecting an appropriate functional form for the model and choosing which variables to include. As a first step of regression analysis, a person specifies the model. If an estimated model is misspecified, it will be biased and inconsistent.[1]
Specification error and bias
Specification error occurs when an independent variable is correlated with the error term. There are several different causes of specification error:
- incorrect functional form
- a variable omitted from the model may have a relationship with both the dependent variable and one or more of the independent variables (omitted-variable bias);[2]
- an irrelevant variable may be included in the model
- the dependent variable may be part of a system of simultaneous equations (simultaneity bias)
- measurement errors may affect the independent variables.
Detection
The Ramsey RESET test can help test for specification error.
See also
References
- MacKinnon, James G. (1992). "Model Specification Tests and Artificial Regressions". Journal of Economic Literature 30 (1): 102–146. JSTOR 2727880.
- Thursby, Jerry G.; Schmidt, Peter (September 1977). "Some Properties of Tests for Specification Error in a Linear Regression Model". Journal of the American Statistical Association 72 (359): 635–641. doi:10.1080/01621459.1977.10480627. JSTOR 2286231.
- Sapra, Sunil (2005). "A regression error specification test (RESET) for generalized linear models" (PDF). Economics Bulletin 3 (1): 1–6.
Further reading
- Asteriou, Dimitrios; Hall, Stephen G. (2011). "Misspecification: Wrong Regressors, Measurement Errors and Wrong Functional Forms". Applied Econometrics (Second ed.). London: Palgrave MacMillan. pp. 172–197.
- Gujarati, Damodar N.; Porter, Dawn C. (2009). "Econometric Modeling: Model Specification and Diagnostic Testing". Basic Econometrics (Fifth ed.). New York: McGraw-Hill Irwin. pp. 467–522. ISBN 978-0-07-337577-9.
- Kmenta, Jan (1986). Elements of Econometrics (Second ed.). New York: Macmillan. pp. 442–455. ISBN 0-02-365070-2.
- Maddala, G. S.; Lahiri, Kajal (2009). "Diagnostic Checking, Model Selection, and Specification Testing". Introduction to Econometrics (Fourth ed.). Chichester: Wiley. pp. 401–449. ISBN 978-0-470-01512-4.