RESET test after ppml

[Noemi Seng]

Dear community,

I estimated a gravity model with ppml. Now, I want to conduct a Reset test to check whether my model is misspecified. I was wondering: Do I have to do something to include the fixed effects in the fitted values? I conducted the Reset test after estimating the model with ppmlhdfe and after ppml, with ppmlhdfe, the p-value is 0.9 and with ppml, it is 0.04.

Code for ppml:

local controls year_* hostcountry_* origincountry_* outlier_*
local gravity_countrylevel lngdp_o lngdp_d lndistw abs_sk_diff lnsumgdp lnsmp_dest comcol col45 comlang_off contig xr_host xr_origin regime_dejure fd_distance ivr_dist ltowvs_dist
ppml total_fdi_stock `controls' `gravity_countrylevel', cluster(country_pair_encode)
predict fit, xb
gen fit2 = fit^2
local controls year_* hostcountry_* origincountry_* outlier_*
local gravity_countrylevel lngdp_o lngdp_d lndistw abs_sk_diff lnsumgdp lnsmp_dest comcol col45 comlang_off contig xr_host xr_origin regime_dejure fd_distance ivr_dist ltowvs_dist fit2
ppml total_fdi_stock `controls' `gravity_countrylevel', cluster(country_pair_encode)
test fit2 = 0

Code for ppmlhdfe:

local gravity_countrylevel lngdp_o lngdp_d lndistw abs_sk_diff lnsumgdp  lnsmp_dest comcol col45 comlang_off contig xr_host xr_origin regime_dejure fd_distance
ppmlhdfe total_fdi_stock `gravity_countrylevel', absorb(year iso3_d iso3_o outlier) d cluster(country_pair_encode)
predict fit, xb
gen fit2 = fit^2
local gravity_countrylevel lngdp_o lngdp_d lndistw abs_sk_diff lnsumgdp  lnsmp_dest comcol col45 comlang_off contig xr_host xr_origin regime_dejure fd_distance fit2
ppmlhdfe total_fdi_stock `gravity_countrylevel', absorb(year iso3_d iso3_o outlier) d cluster(country_pair_encode)
test fit2=0

I appreciate any help.

Best
Noemi

[Maxence Morlet]

I think you should include both fit and fit2 in your RESET test.