A Two Stage Approach to Spatiotemporal Analysis with Strong and Weak Cross-Sectional Dependence

35 Pages Posted: 11 Feb 2014

See all articles by Natalia Bailey

Natalia Bailey

Monash University

Sean Holly

University of Cambridge - Department of Applied Economics

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

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Date Written: January 31, 2014

Abstract

An understanding of the spatial dimension of economic and social activity requires methods that can separate out the relationship between spatial units that is due to the effect of common factors from that which is purely spatial even in an abstract sense. The same applies to the empirical analysis of networks in general. We are able to distinguish between cross-sectional strong dependence and weak dependence. Strong dependence in turn suggests that there are common factors. We use cross unit averages to extract common factors and contrast this to a principal components approach widely used in the literature. We then use a multiple testing procedure to determine significant bilateral correlations (signifying connections) between spatial units and compare this to an approach that just uses distance to determine units that are neighbours. We apply these methods to real house price changes at the level of Metropolitan Statistical Areas in the USA, and estimate a heterogeneous spatiotemporal model for the de-factored real house price changes and obtain significant evidence of spatial connections, both positive and negative.

Keywords: spatial and factor dependence, spatiotemporal models, house price changes

JEL Classification: C210, C230

Suggested Citation

Bailey, Natalia and Holly, Sean and Pesaran, M. Hashem, A Two Stage Approach to Spatiotemporal Analysis with Strong and Weak Cross-Sectional Dependence (January 31, 2014). CESifo Working Paper Series No. 4592, Available at SSRN: https://ssrn.com/abstract=2393922

Natalia Bailey

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Sean Holly

University of Cambridge - Department of Applied Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DE
United Kingdom
+44-1223-335251 (Phone)

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

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