On the finite sampling properties of the Zheng test for omitted and irrelevant variable problems

Abstract

The paper conducts simple Monte Carlo simulation investigations to ascertain the finite sample properties of the Zheng test when applied to familiar specification errors in the form of omitted and irrelevant variable problems. Results indicate that the respective estimated sizes underestimate the nominal sizes. In an omitted variable setting, the Zheng test performs rather well with estimated powers being sensitive to increasing bandwidth parameters. However, the test exhibited contrasting results in examining power performance for testing irrelevant regressors.

Acknowledgements

Financial and administrative support from the Japan International Cooperation Agency (JICA) and Japan International Cooperation Center (JICE) are gratefully acknowledged. I would also like to thank my supervisor, Prof. Kimio Morimune, Prof. Nishiyama, Prof. Hitomi and Prof. Yatchew for allowing me to use and modify his Splus scripts for conducting the simulation exercises.