Question

1. Functional form misspecification and RESET

Consider the following model that satisfies assumption MLR.4:

y=β0+β1x1+. . .+βkxk+u

Which of the following describes the regression specification error test (RESET)? PICK all that apply.

1. RESET picks up all kinds of neglected nonlinearities when more quadratic terms are added to the original model.

2. RESET works better when there are many explanatory variables in the original model, as it increases its degrees of freedom.

3. To implement RESET, the researcher must add at least seven functions of the fitted values in an expanded regression.

D. The test does not pick up certain kinds of neglected nonlinearities by adding quadratic terms.

2. Consider the expanded equation of the original model, where yˆ denotes the OLS fitted values from estimating the previous model. (Note: yˆ2 and yˆ3 are nonlinear functions of the xj

.)

y=β0+β1x1+. . .+βkxk+δ1yˆ2+δ2yˆ3+error

When the null hypothesis is that the original model is correctly specified, a significant F statistic suggests:

A. There is some short of      functional form problem in the original model.

B. There is no functional form problem in the original model.

Answer 1

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