Question: Suppose the RESET test rejects its null hypothesis. What should we do in the next step? Continue with the original model you have Add to

Suppose the RESET test rejects its null hypothesis. What should we do in the next step?

  1. Continue with the original model you have
  2. Add to the model the squares and cubes of all explanatory variables in the original model
  3. Work with the unrestricted model that was estimated for the RESET test.
  4. Search for appropriate nonlinear functions of the explanatory variables in the original model and add them as additional regressors.

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