Hello,
I'm running an OLS regression with around 2000 observations and a few variables - most of them are categorical variables.
When the dependent variable is regressed against certain independent variables (e.g. variables A, B, C and D), the model passes the RESET test.
However, when an additional variable is added (e.g. variable E), it fails the test. This additional variable happens to be significant and increase the adjusted R-squared significantly.
Why would this be the case? Could it be because the new variable, although significant, is non-linear?
Thank you,
Ana
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