Spatial Panel Data Models with Common Shocks

43 Pages Posted: 1 Jan 2014

See all articles by Jushan Bai

Jushan Bai

Columbia University

Kunpeng Li

Capital University of Economics and Business

Date Written: December 2013

Abstract

Spatial effects and common-shocks effects are of increasing empirical importance. Each type of effects has been analyzed separately in a growing literature. This paper considers a joint modeling of both types of effects. Joint modeling allows one to evaluate which type is present or more important. A large number of incidental parameters exist under the joint modeling. Heteroscedasticity is also allowed. The quasi maximum likelihood method (MLE) is proposed to estimate the model. This paper demonstrates that the quasi-MLE can effectively deal with the incidental parameters problem. An inferential theory including consistency, rate of convergence and limiting distributions is developed. The quasi-MLE can be easily implemented via the EM algorithm, as confirmed by the Monte Carlo simulations. The simulation further reveals the excellent finite sample properties of the quasi-MLE. Some potential extensions are discussed.

Keywords: Panel data models, spatial interactions, common shocks

JEL Classification: C33, R10

Suggested Citation

Bai, Jushan and Li, Kunpeng, Spatial Panel Data Models with Common Shocks (December 2013). Available at SSRN: https://ssrn.com/abstract=2373628 or http://dx.doi.org/10.2139/ssrn.2373628

Jushan Bai (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Kunpeng Li

Capital University of Economics and Business ( email )

Beijing
China

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