IV Estimation of Spatial Dynamic Panels with Interactive Effects: Large Sample Theory and an Application on Bank Attitude Toward Risk

Monash Business School, Working Paper 11/20, March 2020

36 Pages Posted: 29 Jul 2020

See all articles by Guowei Cui

Guowei Cui

Huazhong University of Science and Technology

Vasilis Sarafidis

affiliation not provided to SSRN

Takashi Yamagata

University of York - Department of Economics and Related Studies; Osaka University - Institute of Social and Economic Research

Date Written: March 27, 2020

Abstract

The present paper develops a new Instrumental Variables (IV) estimator for spatial, dynamic panel data models with interactive effects under large N and T asymptotics. For this class of models, the only approaches available in the literature are based on quasi-maximum likelihood estimation. The approach put forward in this paper is appealing from both a theoretical and a practical point of view for a number of reasons. Firstly, the proposed IV estimator is linear in the parameters of interest and it is computationally inexpensive. Secondly, the IV estimator is free from asymptotic bias. In contrast, existing QML estimators suffer from incidental parameter bias, depending on the magnitude of unknown parameters. Thirdly, the IV estimator retains the attractive feature of Method of Moments estimation in that it can accommodate endogenous regressors, so long as external exogenous instruments are available. The IV estimator is consistent and asymptotically normal as N, T go to infinity, with N/T^2 going to 0 and T/N^2 tending to 0. The proposed methodology is employed to study the determinants of risk attitude of banking institutions. The results of our analysis provide evidence that the more risk-sensitive capital regulation that was introduced by the Basel III framework in 2011 has succeeded in influencing banks’ behavior in a substantial manner.

Keywords: Panel Data, Instrumental Variables, State Dependence, Social Interactions, Common Factors, Large N and T Asymptotics, Bank Risk Behavior, Capital Regulation

JEL Classification: C33, C36, C38, C55, G21

Suggested Citation

cui, guowei and Sarafidis, Vasilis and Yamagata, Takashi, IV Estimation of Spatial Dynamic Panels with Interactive Effects: Large Sample Theory and an Application on Bank Attitude Toward Risk (March 27, 2020). Monash Business School, Working Paper 11/20, March 2020, Available at SSRN: https://ssrn.com/abstract=3642451 or http://dx.doi.org/10.2139/ssrn.3642451

Guowei Cui

Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China
18171270610 (Phone)

Vasilis Sarafidis

affiliation not provided to SSRN

Takashi Yamagata (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Osaka University - Institute of Social and Economic Research ( email )

6-1, Mihogaoka
Suita, Osaka 567-0047
Japan

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