Consistent Misspecification Testing in Spatial Autoregressive Models

58 Pages Posted: 3 Sep 2020

See all articles by Jungyoon Lee

Jungyoon Lee

University of London, Royal Holloway College - Department of Economics

Peter C. B. Phillips

Yale University - Cowles Foundation; University of Auckland; University of Southampton; Singapore Management University - School of Economics

Francesca Rossi

University of Verona - Department of Economics

Date Written: August 27, 2020

Abstract

Spatial autoregressive (SAR) and related models offer flexible yet parsimonious ways to model spatial or network interaction. SAR specifications typically rely on a particular parametric functional form and an exogenous choice of the so-called spatial weight matrix with only limited guidance from theory in making these specifications. The choice of a SAR model over other alternatives, such as spatial Durbin (SD) or spatial lagged X (SLX) models, is often arbitrary, raising issues of potential specification error. To address such issues, this paper develops an omnibus specification test within the SAR framework that can detect general forms of misspecification including that of the spatial weight matrix, functional form and the model itself. The approach extends the framework of conditional moment testing of Bierens (1982, 1990) to the general spatial setting. We derive the asymptotic distribution of our test statistic under the null hypothesis of correct SAR specification and show consistency of the test. A Monte Carlo study is conducted to study finite sample performance of the test. An empirical illustration on the performance of our test in the modeling of tax competition in Finland and Switzerland is included.

Keywords: Conditional moment test, Misspecification test, Omnibus testing, Spatial AR, Weight matrix misspecification

JEL Classification: C21, C23

Suggested Citation

Lee, Jungyoon and Phillips, Peter C. B. and Rossi, Francesca, Consistent Misspecification Testing in Spatial Autoregressive Models (August 27, 2020). Available at SSRN: https://ssrn.com/abstract=3683830 or http://dx.doi.org/10.2139/ssrn.3683830

Jungyoon Lee

University of London, Royal Holloway College - Department of Economics ( email )

Royal Holloway College
Egham
Surrey, Surrey TW20 0EX
United Kingdom

Peter C. B. Phillips (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3695 (Phone)
203-432-5429 (Fax)

University of Auckland ( email )

Private Bag 92019
Com. A room: 102
Auckland
New Zealand
+64 9 373 7599 x7596 (Phone)

University of Southampton

Southampton, SO17 1BJ
United Kingdom

Singapore Management University - School of Economics

90 Stamford Road
178903
Singapore

Francesca Rossi

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
41
Abstract Views
195
PlumX Metrics