Ramsey’s regression specification error test (RESET) is thought to be robust to spatial correlation. Building on the literature on spurious spatial regression, we show that this is not so in presence of spatial correlation in both the error and the independent variable of an econometric model. Correcting the test for spatial correlation improves its performance, though in large samples this strategy is not completely successful. Once assuming that spatial autocorrelation in both the independent variable and in the error is produced by a spatial moving average model instead of a spatial autoregressive one, RESET displays more robustness.
['Andrea Vaona']
Spatial autocorrelation and the sensitivity of RESET: a simulation study