Estimation and Inference for Spatial Models with Heterogeneous Coefficients: An Application to U.S. House Prices

79 Pages Posted: 15 Mar 2019 Last revised: 15 Jun 2020

See all articles by Michele Aquaro

Michele Aquaro

European Commission, Joint Research Centre

Natalia Bailey

Monash University

M. Hashem Pesaran

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

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Date Written: June 15, 2020

Abstract

This paper considers the estimation and inference of spatial panel data models with heterogeneous spatial lag coefficients, with and without weakly exogenous regressors, and subject to heteroskedastic errors. A quasi maximum likelihood (QML) estimation procedure is developed and the conditions for identification of the spatial coefficients are derived. The QML estimators of individual spatial coefficients, as well as their mean group estimators, are shown to be consistent and asymptotically normal. Small sample properties of the proposed estimators are investigated by Monte Carlo simulations and results are in line with the paper's key theoretical findings even for panels with moderate time dimensions and irrespective of the number of cross section units. A detailed empirical application to U.S. house price changes during the 1975-2014 period shows a significant degree of heterogeneity in spatio-temporal dynamics over the 338 Metropolitan Statistical Areas considered.

Keywords: Spatial Panel Data Models, Heterogeneous Spatial Lag Coefficients, Identification, Quasi Maximum Likelihood (QML) Estimators, Non-Gaussian Errors, House Price Changes, Metropolitan Statistical Areas

JEL Classification: C21, C23

Suggested Citation

Aquaro, Michele and Bailey, Natalia and Pesaran, M. Hashem, Estimation and Inference for Spatial Models with Heterogeneous Coefficients: An Application to U.S. House Prices (June 15, 2020). USC-INET Research Paper No. 19-07, Available at SSRN: https://ssrn.com/abstract=3352931 or http://dx.doi.org/10.2139/ssrn.3352931

Michele Aquaro (Contact Author)

European Commission, Joint Research Centre ( email )

Via E. Fermi 2749
Ispra (VA), 21027
Italy

Natalia Bailey

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

M. Hashem Pesaran

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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