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Specification Error Tests and Investment Functions

Peter D. Loeb

Abstract

This paper analyzes three quarterly investment models for the detection of certain specification errors. The models are those of Anderson [1 and 2], Eisner [4], and Meyer-Glauber [10]. The models are applied to thirteen manufacturing industries. A set of specification error tests developed by Ramsey [12,13, and 14] are applied to the above models so as to detect the specification errors of omission of variables, incorrect functional form, simultaneous equation problems, and heteroskedasticity. The models are ranked in order of the number of times they failed to be rejected by the specification error tests and the rank scheme is compared to that found in a previous study by Jorgenson, Hunter, and Nadiri [6], where more conventional criteria are used for ranking the models.