RE: st: ivreset

[Arne Risa Hole <ah522@york.ac.uk>]

Austin, Mark,

Thank you both for your replies, rescaling the forecast did the trick 
(sorry for the bad formatting of my code before, it looked fine in my email 
programme).

I understand the motivation behind the rescaling, but I�m slightly 
concerned about the fact that it produces a different test statistic 
compared to using the actual forecast. Note that this is not the case when 
using the Reset test following OLS � the test statistic is invariant to the 
rescaling in this case.

I would think that since the two approaches (rescaling/ no rescaling) 
produce different results, the correct test statistic is that using the 
actual forecast?

Cheers 
Arne

On Mar 17 2006, Schaffer, Mark E wrote:


> Austin, Arne,
>
> > -----Original Message-----
> > From: Austin Nichols [mailto:austinnichols@gmail.com] 
> > Sent: 16 March 2006 23:30
> > To: statalist@hsphsun2.harvard.edu
> > Subject: Re: st: ivreset
> > 
> > -findit ivreset- then -help ivreset- when installed has a 
> > excellent exposition that begins:
> > 
> > As Pagan and Hall (1983) and Pesaran and Taylor (1999) point 
> > out, a RESET test for an IV regression cannot use the 
> > standard IV predicted values X*beta-hat, because X includes 
> > endogenous regressors that are correlated with u.
> > 
> > Try this code instead:
> > 
> > use http://fmwww.bc.edu/ec-p/data/hayashi/griliches76.dta
> > qui ivreg2 lw s expr tenure rns smsa (iq=med kww)
> > predict ytilde
> > mat b=e(b)
> > mat li b
> > qui regress iq s expr tenure rns smsa med kww
> > qui predict double xh
> > gen yhat=ytil-b[1,1]*iq+b[1,1]*xh
> > sum yhat, meanonly
> > qui replace yhat = (yhat-r(min))/(r(max)-r(min))
> > qui gen double yhat2=yhat^2
> > qui ivreg2 lw s expr tenure rns smsa yhat2 (iq=med kww)
> > test yhat2
> > qui ivreg2 lw s expr tenure rns smsa (iq=med kww)
> > ivreset
> > 
> > Now, as to why
> >  replace yhat = (yhat-r(min))/(r(max)-r(min))
> > I cannot tell you, but it's in ivreset.ado
>
> It's to rescale yhat so that when it's squared, cubed, etc., it doesn't
> get wildly out of scale relative to the other regressors.  This can
> cause problems for the regression that includes these terms.
>
> Cheers,
> Mark
>
>
> > On 16 Mar 2006 19:10:13 +0000, Arne Risa Hole wrote:
> > > I am using ivreset to do a Pesaran-Taylor Reset test after ivreg2. 
> > > However, I am not able to replicate the result from ivreset 
> > manually. For example:
> > >
> > > use http://fmwww.bc.edu/ec-p/data/hayashi/griliches76.dta
> > 
> > 
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