SpatEconBasile2012 New

Introduction
Notions of spatial statistics

Spatial econometrics: model specication
Estimation techniques
Diagnostics
(Spatially) varying parameters models
Spatial dependence in panel data models
Some notes on Spatial Statistics and Spatial
Econometrics
Roberto Basile
Second University of Naples (roberto.basile@unina2.it)
Roma, 2012
Roberto Basile Spatial Econometrics
Introduction
Diagnostics
Course content
Introduction
Diagnostics

Introduction
Diagnostics
Spatial data
Spatial data are those data which combine attribute information

(e.g. name of the spatial object, population density, productivity,
etc.) with location information (spatial coordinates)
(georeferenced data)
For example, productivity gures are a-spatial unless the

locations for which the data apply are also given
Introduction
Diagnostics
Types of spatial data
Geo-statistical data: continuous spatial variation. Example: air

temperature
Lattice, regional data (areal or polygonal data):
the domain is xed and discrete
spatial locations are often referred to as sites
we assign to each site one precise spatial coordinate, a

representative location (centroid)
regular polygons (lattice data) and irregular polygons (regional

data). For ex. Lombardia and Lazio
Point data: spatial component = point coordinates {x, y}. Ex.

Houses, rms
Line data (arcs): spatial component = ordered set of N points

dening its location {x
1
, y
1
; x
2
, y
2
; ...; x
N
, y
N
}. Ex. Roads, rivers
Introduction
Diagnostics
Special properties of spatial data
Global spatial autocorrelation or spatial dependence:
Positive: locations close to each other exhibit more similar

values than those further apart. High (low) values are
sistematically surrounded by high (low) values
Negative: high (low) values are sistematically surrounded by

low (high) values
Local spatial autocorrelation:
If none of the two cases occur sistematically, there is no global

spatial dependence, even though some local spatial
autocorrelation may exist
Introduction
Diagnostics
Modiable areal unit problem (MAUP) (polygonal data)
Scale eects: dierent results obtained with spatial aggregation

at dierent levels that is with spatial units of dierent dimensions
Aggregation or zoning: dierent results obtained with dierent

spatial aggregation using spatial units of the same dimension
Introduction
Diagnostics
Distance
Once we know the coordinates of two points, we can compute

their distance
Arc distance (great-circle distance; takes account of the Earths

curvature) :
s
ij
= R arccos
_
cos
_
90
x
i
_
cos
_
90
x
j
_
+
sin
_
90
x
i
_
sin
_
90
x
j
_
cos
_
90
x
i
_
cos
_
y
j
y
i
_
_
R is the radius of the earth, x and y are latitudes and longitudes
Introduction
Diagnostics
Distance
It is often more convenient to ignore the curvature of the Earth
Euclidean distance
d
1,2
=
_
(x
1
x
2
)
2
+ (y
1
y
2
)
2
Minkowski metrics (a more general form)

d
p
1,2
=
_
|x
1
x
2
|
p
+|y
1
y
2
|
p
1/p
where p is a constant that can have any value from 1 to
p = 1: Manhattan distance (road distance)
p = 2: Euclidean distance (shorter)
p can be estimated from a sample of road distances
Introduction
Diagnostics
GIS revolution and ESRI shapeles
Information on spatial data and coordinates are stored in special

les called shapeles produced through Geographical Information
System (GIS) softwares
A shapele stores geometry and attribute information for the

spatial features in a data set. Features may be points, polygons
(i.e. area features), arcs (i.e. sets of connected points) and
multi-points (i.e. clusters of points)
ESRI (Environmental Systems Research Institute) software is the

most famous GIS software used to create shapeles
(http://www.esri.com/)
Introduction
Diagnostics
Spatial econometrics
Spatial econometrics is the collection of econometric tools dealing

with problems of
spatial dependence
spatial heterogeneity
heteroskedasticity
parameter heterogeneity (instability) over space

Introduction
Diagnostics
Sources of spatial dependence
Spatial spillover
Interregional knowledge ows, trade, factor movements and so

on
Omitted variables
Unobservable factors (e.g. location amenities) exert an

inuence on the dependent variable and are spatially correlated
Measurement errors and unobserved heterogeneity
Administrative boundaries that dont accurately reect the

nature of underlying DGP
Introduction
Diagnostics
Consequences of spatial dependence
The presence of spatial dependence violates one of the assumptions

of the classical regression model: independence
This creates a problem in assessing statistical inference: the errors

in the regression model can no longer be assumed to have zero
covariances with each other
Solutions
spatial econometric models (spatial lag, spatial error, spatial

Durbin models)
use data at a dierent spatial scale
include proxy of non-observables
include spatial coordinates and/or spatial dummies

Introduction
Diagnostics
Spatial heterogeneity
Lack of spatial stability of the relationships under study:

functional forms and parameters vary with location and are not
homogenous throughout the data set
e.g. classications of spatial observation: North and South;

Urban and rural areas
Solutions
estimate separate models for each group and ask
are the two relations consistent with the data (Chow

test)?
is there a trade o between spatial dependence and

spatial heterogeneity?
other methods: varying parameters, random coecients,

GWR, (geo)additive semiparametric models
Introduction
Diagnostics
Some Useful Reading Materials
Anselin L. (1988), Spatial Econometrics, Methods and Models.

Boston: Kluwer Academic
Anselin L. (2003), Spatial Externalities, Spatial Multipliers and

Spatial Econometrics, International Regional Science Review, 26,
153-166
Anselin L. (2006), Spatial regression, mimeo
Fotheringham, A. S., C. Brunsdon, and M. E. Charlton. 2000.

Quantitative Geography: Perspectives on Spatial Data Analysis.
Thousand Oaks, CA: Sage Publishers
LeSage J. and Pace R.K. (2009), Introduction to Spatial

Econometrics, Taylor & Francis Group, LLC.
Introduction
Diagnostics
Software
GIS :
GRASS: Geogrpahic Resources Analysis Support System
Arc/Info and ArcView GIS
maptools (R package)
Spatial Regression Analysis :
SpaceStat (gauss routine)
spdep (R package), written by Roger Bivand

(http://crn.r-project.org/)
S+Spatialstats (S-plus)
spatial toolbox (Matlab), written by LeSage-Pace
spatreg (Stata), written by Maurizio Pisati
GeoBugs (http://www.mrc-
bsu.cam.ac.uk/bugs/winbugs/geobugs.shtml)
STARS
Introduction
Diagnostics
Motivating Example: Ertur C. and Koch W. (2007)
The aggregate Cobb-Douglas production function for region i

(i = 1, . . . , N) at time t
Y
it
= A
it
K
k
it
L
1
k
it
withA
i
the aggregate level of technology
A
it
=
t
k
it
N
j =i
A
w
ij
jt

t
= (0) e
t
: exogenous technological progress
it
: technological externalities among rms within a region

j =i
A
w
ij
jt
: spatial technological externalities ( reects the
degree of spatial externalities)
Introduction
Diagnostics
Motivating Example: Ertur C. and Koch W. (2007)
This model yields a conditional convergence equation which is

characterized by parameter heterogeneity
y
= D ln y
0
+ DW ln y
0
+ DX + DWX + DW
y
+
X =
_
c ln s
k
ln (n + g + )
D = diag
_
1 e
i
t
_
is a diagonal matrix reecting the
specic eects of the convergence speed in each region
is a diagonal matrix containing scale heterogeneous

parameters reecting the eects of the speeds of convergence
in the neighbouring economies
Introduction
Diagnostics
Motivating Example: Ertur and Koch (2007)
The growth rate is a negative function of the initial level of

per-capita income and a positive function of the initial
conditions of its neighbours
It is also a positive function of reproducible factors

accumulation rates observed within the region and in its
neighbours,(ln s
k
, W ln s
k
), and a negative function of the
eective rate of depreciation within the region and in the
neighbours (ln (n + g + ) , W ln (n + g + ))
The last term, W

y
, represents the rate of growth in the
neighbouring regions
Introduction
Diagnostics
Spatial spillover and spatial heterogeneity in long-run
regional economic growth: References
Ertur C. and Koch W. (2011), A Contribution to the Theory and

Empirics of Shumpeterian Growth with Worldwide Interactions,
Journal of Economic Growth, 16:3, 215-255
Ertur C. and Koch W. (2007), Growth, Technological

Interdependence and Spatial Externalities: Theory and Evidence,
Journal of Applied Econometrics, vol. 22, pp. 1033-1062
Introduction
Diagnostics
Spatial spillover and spatial heterogeneity in long-run
regional economic growth: References
Basile R. (2008), Regional Economic Growth in Europe: a

Semiparametric Spatial Dependence Approach, Papers in Regional
Science, Vol. 87, pp. 527-544
Basile R. (2009), Productivity Polarization Across Regions in

Europe: the Role of Nonlinearities and Spatial Dependence,
International Regional Science Review, Vol. 32, n. 1, 92-115
Rey S.J. and J. LeGallo (2009), Spatial Analysis of Economic

Convergence, in T. C. Mills and K. Patterson, Palgrave Handbook
of Econometrics Volume II: Applied Econometrics, Pages 1251-1293
Introduction
Diagnostics
Course content
Introduction
Diagnostics

Introduction
Diagnostics
Spatial stochastic processes (random elds)
Spatial data are thought as drawn from a probability model

specied as a density function of the form
=
_
f
X
S
(X
S
; ) , s S,
_
f
X
S
(X
S
; ) represents the joint probability density function of
an ordered sequence of random variables {X
S
|s S} called
spatial random processes or random elds
s is an index referring to the spatial location
It can be either continuous (coordinates of N points in R

2
or discrete (regional data)

Introduction
Diagnostics
Topology and spatial interdependence
In the case of a continuous random eld, the topology (i.e. the

relationship between spatial features: linkages, adjacencies,
inclusion, distance and so on) of the reference space is fully
specied through the concept of distance
In the case of discrete random elds, the topology needs to be

specied arbitrarily by the researcher
In theory, every observation on a variable y at s S is related

formally through the function f to the magnitude for the variable in
other spatial units in the system:
y
i
= f
_
y
j
_
i = 1, ..., N i = j
This would result in an unidentiable system, with many more

parameters
_
N
2
N
_
than observations (N)
Introduction
Diagnostics
Solving the identication issue
We need to impose a structure (parameter restrictions) on the

relationships embedded in f , i.e., a particular form for the spatial
process
In particular spatial dependence should conform to the fundamental

theorem of regional science: distance matters (observations that
are near should reect a greater degree of spatial dependence than
those more distant from each other). Toblers law of
geography:Everything is related to everything else, but near things
are more related than distant things (spatial friction)
This suggests that the strength of spatial dependence between

observations should decline with the distance between observations,
or neighbouring units should exhibit a higher degree of spatial
dependence than units located far apart
Spatial econometrics allows to solve an identication problem

Introduction
Diagnostics
Various denitions of neighbourhood
The very notion of spatial dependence implies the need to determine

which other units in the spatial system have an inuence on the
particular unit under consideration. Formally, this is expressed in the
topological notions of neighbourhood
Critical cut-o neighbourhood
k -Nearest neighbours
Contiguity based neighbourhood

Introduction
Diagnostics
Critical cut-o neighbourhood
Two sites s
i
and s
j
are said to be neighbours if 0 d
ij
d
with
d
ij
the appropriate distance adopted and d
representing the
critical cut-o
A minimum distance ensures that each location has at least one

neighbour
If the threshold distance is set to a smaller value, islands will result

Introduction
Diagnostics
k-Nearest neighbours
Two sites s
i
and s
j
are said to be neighbours if d
ij
min d
ik
k
This criterion ensures that each observation has exactly the same
number (k) of neighbours
Introduction
Diagnostics
Contiguity based neighbourhood
Two sites s
i
and s
j
are said to be neighbours if they share a
common boundary
Rook-contiguity : Regions share a common edge (exclusion of

only corner touching)
Bishop-contiguity : Consider only touching corners
Queen-contiguity : Consider either touching corners or

touching edges
Introduction
Diagnostics
Spatial weight matrices
Ones neighbouring regions or points have been identied, there

remains the problem of how to weight them in any calculation
An option is to not give any weight. In such a case we can build a

binary spatial weights matrix
Introduction
Diagnostics
Binary spatial weights matrix
N by N matrix W , with elements w

ij
measuring the association
or neighbourhood between regions i and j
w
ij
= 1 for i and j neighbours
w
ij
= 0 otherwise
0 1 0 0
1 0 1 0
0 1 0 1
0 0 1 0
W

=

Introduction
Diagnostics
Binary spatial weights matrix-Row standardization
w
s
ij
= w
ij
/
j
w
ij
s.t.

j
w
s
ij
= 1
0 1 0 0
1 2 0 1 2 0
0 1 2 0 1 2
0 0 1 0
W

=

Introduction
Diagnostics
Binary spatial weights matrix
k-nearest-neighbours weights matrix : w

ij
= 1 if the
geographical center of region j is one of the nearest k to the
center of region i ; otherwise w
ij
= 0 . This weights matrix is not
symmetric
Contiguity weights matrix : w

ij
= 1 if regions i and j have a
common boundary; otherwise w
ij
= 0
Distance-based binary weights matrix : w

ij
= 1 if the (great-circle
or Euclidean) distance between regions i and j is less than a
threshold cut-o distance, otherwise w
ij
= 0
Introduction
Diagnostics
Cli and Ord (1981)
Cli and Ord (1981) suggest to use the length of the common
border between contiguous regions, weighted by a distance function:
w
ij
=
_
d
ij
a
_
ij
b
d distance between (centroids of) spatial units i and j
share of common boundary between i and j (reects the
intensity of the relationship)
a and b parameters estimated from data or chosen a priori
w
ij
=
_
d
ij
a
: gravitational-type weighting
Introduction
Diagnostics
Alternative notions of proximity
Perceived distance or proximity
Road distance or travel distance
Non-geographical proximity criteria

institutional
technological
relational
social
other types of proximity: use of interaction data (migration
ows, trac or telephone calls)
Introduction
Diagnostics
Higher Orders of Contiguity (neigbours of neigbours)
Pure higher order contiguity : does not include locations that

where also contiguous of lower order (textbook denition)
Cumulative order contiguity : includes all lower order neighbours as

well
Introduction
Diagnostics
Spatial lag operator
The spatial lag operator works to produce a weighted average of the

neighbouring observations

+

= = =

+

1 2
2 1 3
3 2 4
4 3
0 1 0 0
1 2 0 1 2 0
1 2 1 2
0 1 2 0 1 2
1 2 1 2
0 0 1 0
ij
s s
j
j
y y
y y y
w y
y y y
y y
W y
W
s
= raw standardized matrix
Introduction
Diagnostics
Spatial autocorrelation statistics
Null Hypothesis : no spatial autocorrelation
Spatial randomness (vs. spatial clustering)
Values observed at a location do not depend on values

observed at neighbouring locations
Observed spatial pattern of values is equally likely as any other

spatial pattern
The location of values may be altered (spatial permutation)

without aecting the information content of the data
Alternative Hypotheses
Positive spatial autocorrelation: like values tend to cluster in

space / Neighbours are similar
Negative spatial autocorrelation: Neighbours are dissimilar

Introduction
Diagnostics
Global spatial autocorrelation
Morans (1950) I
Gearys (1954) c
Getis and Ords (1992) G
We compute only one test statistic which synthesizes the

information about the degree of spatial dependence
Introduction
Diagnostics
Local spatial autocorrelation
Local Morans I (Anselin, 1995)
Local Gearys c (Anselin, 1995)
Local G
(Getis and Ord, 1995)
we compute a test statistic for each point in space. The aim is

to learn about each individual datum by relating it in some
way to the values observed at neighbouring locations often
using maps to visualize the output
Introduction
Diagnostics
Global Morans (1950) I spatial autocorrelation statistic
I =
_
N
j
w
ij
_
_
j
w
ij
(x
i
x) (x
j
x)
i
(x
i
x)
2
_
It measures the extent to which high values are generally located

near to other high values and low values are generally located near
to other low values
Where the data are distributed such that high and low values are
generally located near each other, the data are said to exhibit
negative spatial autocorrelation
When there is no autocorrelation present, the expectation

ofI is1/(N 1)
When there is a maximum autocorrelation present I will approach 1

Introduction
Diagnostics
Gearys (1954) c
c =
_
(N 1)
2
j
w
ij
_
_
j
w
ij
(x
i
x
j
)
2
i
(x
i
x)
2
_
When there is no autocorrelation present, the expectation of c is 1
When there is a maximum autocorrelation present c will be near 0
c is more sensitive to |x
i
x
j
|, while I is more sensitive to extreme
x-values
However, in general, the results of analyses using c and using I will

provide bradly the same conclusions
Introduction
Diagnostics
Classical statistical inference
Classical statistical inference operates as follows:
A null hypothesis is stated, such as the population from

which this sample was drawn has a parameter value of zero.
Ex.: H
0
: =
0
Then, a statistic, such as a t-statistic or a z-score, is

calculated from the sample data set. Ex.: Z =

0
Var ()
This statistic is compared with a theoretical distribution with

known probability properties (e.g. the student-t or the
standard normal distribution). On the basis of this comparison,
we can reject or accept the null hypothesis according to some
a priori and arbitrary cut-o point
Introduction
Diagnostics
Classical statistical inference
In our case, for example, we test whether the magnitude of the

observed value of I Moran is unusual in the absence of spatial
aggregation and reject the hypothesis of no spatial autocorrelation if
the I Moran statistic is suciently extreme. So we compute a Z
score and compare it with the normal distribution
Introduction
Diagnostics
Inference on Morans I based on approximate tests
The expected value and variance of the Moran I for samples of size
N could be calculated according to the assumed pattern of spatial
data distribution and the normal test for the null hypothesis of no
spatial autocorrelation between observed values over the N locations
can be conducted based on the standardized Moran I
The expected value of I is 1/(N 1)

Introduction
Diagnostics
Inference on Morans I based on approximate tests
Two theoretical formulae to calculate the variance of I

- Normal approximation: each observed value of the attribute x
is drawn independently from a normal distribution
- Random approximation: the process producing the observed
data pattern is random and the observed pattern is just one out of
the many possible permutations of N data values distributed in N
spatial units
Introduction
Diagnostics
Inference on Morans I under normal approximation
E (I ) =
1
N1
var (I ) =
N
2
S
1
+NS
2
+3
(
i

j
w
ij )
2
(
i

j
w
ij )
2
(N
2
1)
S
1
=
1
2
j
(w
ij
+ w
ji
)
2
S
2
=
i
_
j
w
ij
+
j
w
ji
_
2
Under the normal approximation, var (I ) only depends on the

spatial weights and not on the variable under consideration
Cli and Ord (1981) nd that with a large number of places, the
normal approximation is usually accurate and is of practical value in
testing the signicance of departure from the null hypothesis
Introduction
Diagnostics
Inference on Morans I under randomization
E (I ) =
1
N1
Var (I ) =
NS
4
S
3
S
5
(N1)(N2)(N3)
(
i

j
w
ij )
2
S
1
=
1
2
j
(w
ij
+ w
ji
)
2
S
2
=
i
_
j
w
ij
+
j
w
ji
_
2
S
3
=
N
1
i
(x
i
x)
4
(
N
1
i
(x
i
x)
2
)
2
S
4
=
_
N
2
3N + 3
_
S
1
NS
2
+ 3
_
j
w
ij
_
2
S
5
= S
1
2NS
1
+ 6
_
j
w
ij
_
2
Introduction
Diagnostics
Inference on Morans I
The distribution of I is asymptotically normal under either

assumption (normality or randomization); in other words, as long as
N is large, the following standardized statistic can be calculated
Z =
I E (I )
_
Var (I )
N (0, 1)
and reference made to normal probability tables
The questions raised by this procedure are how large does N have
to be? and how well does the assumption of asymptotic normality
hold even if N is large?
Introduction
Diagnostics
Interpretation of Morans I
E (I ) = expected value of Morans I (i.e. the value that would be

obtained if there were no spatial pattern to the data)
Positive spatial autocorrelation: I > E (I ) and z > 0, there

is spatial clustering of high and low values: similar values cluster
together. If z exceeds the upper one-tailed 5% point of the
standardized normal distribution, we conclude that there is
signicant positive spatial autocorrelation
Negative spatial autocorrelation: I < E (I ) and z < 0, there

is a checherboard patter, competition
Introduction
Diagnostics
Interpretation of Morans I
In practice, values greater than 2 or smaller than -2 indicate spatial

autocorrelation that is signicant at the 5% level
If only positive spatial autocorrelation is conceivable, we carry out a

one-sided signicance test
Introduction
Diagnostics
Inference on Gearys c under normal approximation
E (c) = 1 Var (c) =
(2S
1
+S
2
)(N1)4
(
i

j
w
ij )
2
2(N+1)
(
i

j
w
ij )
2
S
1
=
1
2
j
(w
ij
+ w
ji
)
2
S
2
=
i
_
j
w
ij
+
j
w
ji
_
2
Z =
c E (c)
_
Var (c)
Introduction
Diagnostics
Inference on Gearys c under randomization
E (c) = 1
Var (c) = (N 1) S
1
_
N
2
3N + 3 (N 1) S
3
(1/4) (N 1) S
2
_
N
2
+ 3N 6
_
N
2
N + 2
_
S
3
+
_
j
w
ij
_
2
_
N
2
3 (N 1)
2
S
3
_
/
N (N 1) (N 2)
_
j
w
ij
_
S
3
=
N
1
i
(x
i
x)
4
(
N
1
i
(x
i
x)
2
)
2
Introduction
Diagnostics
Interpretation of Gearys c
The value of Gearys c lies between 0 and 2. 1 means no spatial

autocorrelation. Smaller (larger) than 1 means negative (positive)
spatial autocorrelation
Positive spatial autocorrelation: 0 < c < 1 and z < 0, there

is spatial clustering of high and low values
Negative spatial autocorrelation: 1 < c < 2 and z > 0,

there is a checherboard patter, competition
Introduction
Diagnostics
Values of I and c
When I approaches +1: strong positive spatial autocorrelation
When I approaches -1: strong negative spatial autocorrelation
When I approaches 0: no spatial autocorrelation
When c approaches 0: strong positive spatial autocorrelation
When c approaches 2: strong negative spatial autocorrelation
When c approaches 1: no spatial autocorrelation

Introduction
Diagnostics
Scale eects
Measures of spatial autocorrelation are scale dependent. For

example, clustered point patterns can aggregate to either positively
or negatively autocorrelated areal patterns
This is an example of the MAUP

Introduction
Diagnostics
Global G
Getis. A, Ord, J. K. (1992), The analysis of spatial association by

use of distance statistics, Geographical Analysis, 24, p. 195
measures the way in which values of an attribute are clustered in

space
G (d) =
j
w
ij
(d) x
i
x
j
/
j
x
i
x
j
standardized G statistic, Z (G) =

GE(G)
Var (G)
Z (G) > 0 the spatial pattern is dominated by clusters of high

values
Z (G) < 0 the spatial pattern are dominated by clusters of low

values
Introduction
Diagnostics
Limit of the classical statistical inference
Whichever approach we take to making inference using the classical

approach, it is necessary to be able to assume some form of
theoretical distribution for the test statistic
For some statistics, such as the sample mean and OLS parameter
estimates, the theoretical distributions are well known and can, in
most circumstances, be used with condence that the assumptions
concerning the distributions are met
Introduction
Diagnostics
Limit of the classical statistical inference
However, for some statistics, either there is no known theoretical

distribution against which to compare the observed value, or, where
the distribution is known, the assumptions underlying the use of
that particular distributions are unlikely to be met. Both of these
circumstances are common in the analysis of spatial data and here
the construction of experimental distributions becomes especially
useful
Introduction
Diagnostics
Experimental distributions
The central idea in the use of experimental distributions for

statistical inference is that the sampled data can yield a better
estimate of the underlying distribution of the calculated statistic
than making perhaps unrealistic assumptions about the population
The sample data are re-sampled in some way to create a set of

samples, each of which yields an estimate of a particular statistic. If
this is done many times, the frequency distribution of the statistic
forms the experimental distribution against which the value from
the original sample can be compared. Consequently, the
experimental distribution can be constructed for any statistic, even
if the theoretical distribution is unknown
Introduction
Diagnostics
Experimental distribution in spatial statistics:
randomisation
Assign values to locations by means of a random permutation. With

N locations, N!dierent random permutations of x
i
values (and
thus N! maps) could be produced
Derive the spatial autocorrelation statistic for each of these maps.

Thus, we have a reference distribution against which to evaluate the
one we actually observed
Introduction
Diagnostics
Experimental distribution in spatial statistics:
randomisation
If observed spatial autocorrelation statistic lies in a tail of the

sampling distribution, then we would have a statistical basis for
arguing that the observed spatial distribution of the variable
probably do not come from a random allocation process. We
interpret this fact as suggesting the existence of signicant spatial
autocorrelation in the data
In general, N! random permutations of x

i
values could be produced.
A close approximation to the reference set distribution can be
obtained by sampling from the N! permutation (the Monte Carlo
approach). This method is recommended whenever full
randomization tests appear desirable but computationally
cumbersome
Introduction
Diagnostics
Morans I test: a Monte Carlo experiment
Four steps:
1) calculate I for the observed distribution of x and call this I

2) randomly reassign the N data values across the N spatial units
3) calculate I for the new spatial distribution of x and store
4) repeat steps 2 and 3 many times (at least 99 time and preferably
999 time)
This will produce an experimental distribution for I against which

the value of I
can be assessed. The proportion of values in the

experimental distribution which equal or exceed I
yields an
estimate of the probability that a value of Morans I as high as I
could have risen by chance

Introduction
Diagnostics
Morans I test: a Monte Carlo experiment
For example, if the observed value of I = 0.21 is exceeded by 14 of

the 99 random permutations, we conclude that the chance of
obtaining values of I larger than 0.21 is 14%, which is not a small
probability and, thus, we conclude that the data are not signicantly
spatially auto-correlated
Introduction
Diagnostics
Local spatial autocorrelation statistics
Global spatial autocorrelation statistics are based on the assumption

of stationarity or structural stability over space, which is often
unrealistic in many contexts. Spatial association can be detected
using local spatial autocorrelation indices which allow for local
instabilities in overall spatial association
The aim is to learn more about each individual datum by relating it

in some way to the values observed at neighbouring locations often
by using visualization of the resulting maps as a direct analytical
procedure
Introduction
Diagnostics
Local Morans I
Anselin (1995) has shown that Morans I spatial autocorrelation

coecients can be decomposed into local values. The local form of
Morans I is a product of the zone value and the average in the
surrounding zones:
I
i
(d) =
(x
i
x)
j
w
ij
(
x
j
x
)
i
(x
i
x)
2
/N
E (I
i
) = w
i .
/ (N 1) w
i .
=
j
w
ij
j = i
Var (I
i
) = w
2
i .
V
where V is the variance of I under randomization
Introduction
Diagnostics
Local Morans I
Anselin, L. 1995. Local indicators of spatial association,
Geographical Analysis, 27, 93115
Anselin, L. 1996. The Moran scatterplot as an ESDA tool
to assess local instability in spatial association. pp. 111125 in
M. M. Fischer, H. J. Scholten and D. Unwin (eds) Spatial
analytical perspectives on GIS, London, Taylor and Francis
Introduction
Diagnostics
Moran scatterplot
Plot of Wx against x. A positive relation indicate positive spatial

autocorrelation. The Moran scatterplot can be used to depict
spatial outliers, dened as zones having very dierent values of an
attribute from their neighbour
Four quadrants:
high-high, low-low = spatial cluster
high-low, low-high = spatial outliers
Morans I
Slope of linear scatterplot smoother
Identify Hot Spots:
Signicant local clusters in the absence of global

autocorrelation (or some complication in the presence of global
autocorrelation, i.e. extra heterogeneity)
Signicant local outliers (high surrounded by low and vice

versa)
Indicate local instability (local deviations from global pattern

of spatial autocorrelation)
Introduction
Diagnostics
Local G
Indicates the extent to which a location is surrounded to a distance

d by a cluster of high or low values
There are two variants of this localized statistic (G and G*)

depending on whether or not the unit i around which the clustering
is measured is included in the calculation
Unfortunately there is no theory to guide the use of which statistic

to use in any particular situation although the dierence between
the two will typically be very small in most situations where there
are large numbers of spatial units
Introduction
Diagnostics
Local G
For the situation where i is not included in the calculation

G
i
=
j
w
ij
x
j
j
x
j
j = i
If high values of x tend to be clustered around i, G

i
will be high; if
low values of x tend to cluster around i then G
i
will be low. No
distict clustering of high or low values of x around i will produce
intermediate values of G
i
Introduction
Diagnostics
Local G
For the situation when i is included in the calculation, then the

above formulae simplify to
G
i
=
j
w
ij
x
j
j
x
j
i
where w
ii
must not equal zero
Introduction
Diagnostics
Local G
The G
i
and the G
i
statistics are normally distributed
E (G
i
) = w
i .
/ (N 1) w
i .
=
j
w
ij
j = i
Var (G
i
) = w
i .
(N 1 w
i .
) s
2
i
/ (N 1)
2
(N 2) x
2
i
E (G
i
) = w
i .
/N w
i .
=
j
w
ij
i
Var (G
i
) = w
i .
(N w
i .
) s
2
i
/N
2
(N 1) x
2
i
where s
2
i
is the sample estimate of the variance of x, again
excluding the value i
Introduction
Diagnostics
Local G
A standard variate can be dened as

Z (G
i
) = [G
i
E (G
i
)] / [Var (G
i
)]
1/2
Introduction
Diagnostics
The Critical Distance
The G
i
values are computed around each observation as distance
increases
When the absolute values fail to rise, the cluster diameter is

reached. This is the critical distance d
c
Spatial association weakens beyond d

c
Introduction
Diagnostics
References on Local G
Ord, J. K. and Getis, A. 1995 Local spatial autocorrelation
statistics: distributional issues and an application.
Geographical Analysis, 27, 286306
Getis, A. and Ord, J. K. 1996 Local spatial statistics: an
overview. In P. Longley and M. Batty (eds) Spatial analysis:
modelling in a GIS environment (Cambridge: Geoinformation
International), 261277
Introduction
Diagnostics
Bonferroni correction
The distribution of a generic LISA depends of the distribution for

the correspondent global statistic
Bonferroni correction: if an experimenter is testing N independent

hypotheses on a set of data, then the statistical signicance level
that should be used for each hypothesis separately is 1/N times
what it would be if only one hypothesis were tested
For example, when testing two hypotheses, instead of a value

of of 0.05, one would use a stricter a value of 0.025
Introduction
Diagnostics
Spatial stationarity, ergodicity and isotropy
Spatial stationarity
Since spatial data are not independent, we must make some

assumptions on the stationarity of the process. In time series, this
means that the joined distributions are the same at any point in
time. In the spatial context, this is to say that the joined
distributions are the same throughout space, regardless of absolute
positions, depending only on relative positions
Strict stationarity:
A random eld {X
S
|s S} is stationary (in a strict sense) if the
DGP of the realizations remains constant over space, that is if
s S the joint pdf f (X
S
, s S) does not change when the
subset is shifted in the space
Introduction
Diagnostics
Rotation and translation
If a random eld remains unchanged in terms of its joint pdf after a

translation, it is said to be stationary under translations, or
homogenous
If a random eld remains unchanged in terms of its joint pdf after a

rotation, it is said to be stationary under rotation around a xed
point, or isotropic, which implies that the dependence structure
does not change systematically along dierent directions
A consequence of strict stationarity is that all univariate moments

and all mixed moments of any order do not vary when the reference
space is modied
Introduction
Diagnostics
Weak stationarity
A random eld {X
S
|s S} is said to be stationary of order k if
s S the moments of order k of its joint pdf f (X
S
, s S) do
not change when the subset is subject to translations or rotations
a r.f. is stationary of order 1 if

E (X
s
) = E (X
s+
) = s S
a r.f. is stationary of order 2 if

E (X
s
) = E (X
s+
) = s S
E (X
s
)
2
= E (X
s+
)
2
=
2
s S
E (X
si
, X
sj
) = (d
ij
) s
i
, s
j
S
(the covariance depends only on the distance)
Introduction
Diagnostics
Ergodicity
A random eld {X
S
|s S}which is stationary up to the second
order is said to be ergodic if
lim
d
ij
d
ij
(s
i
, s
j
) = 0
This implies convergence in probability:

N
1
i
x
i
p
N
1
i
(x
i
)
2
p
2
1
N(N1)
j
(xi ) (x
j
)
p
(d
ij
)
Introduction
Diagnostics
Ergodicity
Correlograms are graphs (or tables) showing how autocorrelation

changes with distance
The typical behavior of many spatial phenomena produces a

correlogram that displays values that diminish rapidly towards zero
as the inter-point distance rapidly increases, thus, giving some
empirical substantiation to the rst law of geography (Tobler, 1970)
Introduction
Diagnostics
Exploratory spatial data analysis
Exploratory data analysis (EDA) consists of a set of techniques to

explore data in order to suggest hypotheses or to examine the
presence of outliers (Tukey, 1950)
We recognize the need to visualize data and trends prior to

performing some type of formal analysis
Other use: examine model accuracy and robustness (e.g. mapping

the residuals from a model in order to provide improved
understanding of why the model fails to replicate the data exactly)
Introduction
Diagnostics
Empirical questions of the EDA
Are there variables having unusually high or low values?
What distributions do the variables follow?
Do observations fall into a number of distinct groups?
What associations exist between variables?

Introduction
Diagnostics
Univariate ESDA
Position indices: mean (m), median (Q2), rst and third quartiles
(Q1 and Q3)
Variability indices: standard deviation (s) (spatially corrected),

coecient of variation (CV=s/m), interquartile range(Q3-Q1),
min-max
Concentration indices (spatially corrected): Gini and Theil
Skewness and kurtosis
Global indices of spatial auocorrelation: Morans I, Getis and Ord,

. . .
Local indices of spatial autocorrelation: local Morans I, local G
Visual univariate ESDA: histogram, univariate density, boxplot,

Choroplet maps, Morans scatterplot, maps and density plots of
local G

Introduction
Diagnostics
Multivariate ESDA
Scatterplot matrix and correlation statistics (two variables)
Bivariate kernel density plot (two variables)
Principle component analysis (more than two variables)
Cluster analysis (more than two variables)
Neural networks (more than two variables)
RADVIZ method
Projection Pursuit
Introduction
Diagnostics
Using the R software: download the libraries (packages)
library(car); library(lmtest); library(tseries);
library(lawstat)library(nortest);library(mvnormtest); library(sandwich)
library(quantreg);library(faraway);library(eects) library(leaps);
library(foreign);library(hett) library(ellipse);library(nlme);library(calibrator)
library(Matrix);library(spdep);library(corpcor)
library(labstatR);library(gap);library(strucchange); library(maptools);
library(gstat); library(spdep) library(spectralGP);
library(lattice);library(GeoXp);library(boot)
Introduction
Diagnostics
Using R: set up working directory and Read shapele
setwd(C:/MASTER/SpatEcon/DataShapeFilesMatrices/Europe/NUTS2)
EUselected1 < readShapePoly(EUselected1,IDvar=Id)
plot(EUselected1)
title(main=Western Europe NUTS2 regions)
Introduction
Diagnostics
Using R
Introduction
Diagnostics
Using R: Get spatial coordinates and Plot maps
coord.b < coordinates(EUselected1)
names(EUselected1)
source(quantile.map.R)
gprb < EUselected1$gprb*100
Quantile.map(shape=EUselected1,var=gprb,levels=5,
custom title=growth rate)
Introduction
Diagnostics
Using R: choroplet map
Introduction
Diagnostics
Using R: Spatial weights matrices and spatial lags
# Neighbourhood proximity by distance
# Compute the minimum threshold distance
k1 < knn2nb(knearneigh(coord.b,k=1,longlat=T))
all.linkedT < max(unlist(nbdists(k1,coord.b,longlat=T))); all.linkedT
# The minimum threshold distance is 320 km
# Increasing the cut-o distance
dnb320 < dnearneigh(coord.b, 0, 321,...)
...
dnb1020 < dnearneigh(coord.b, 0, 1020,...)
Introduction
Diagnostics
Using R: Row-standardization
dnb320.listw < nb2listw(dnb320,style=W)
....
dnb1020.listw < nb2listw(dnb1020,style=W)
Introduction
Diagnostics
Using R: Morans I test
growth < EUselected1$gprb
moran.test(growth, dnb320.listw,randomisation=T,
alternative=greater)
...
moran.test(growth,
dnb720.listw,randomisation=T,alternative=greater)
Introduction
Diagnostics
Using R: Morans I test under randomisation
data: growth
weights: nb2listw(dnb720, style = W)
Moran I statistic standard deviate = 13.8164, p-value < 2.2e-16
alternative hypothesis: greater
sample estimates:
Moran I statistic Expectation Variance
0.2024500046 -0.0052910053 0.0002260749
Introduction
Diagnostics
Course content
Introduction
Diagnostics

Introduction
Diagnostics
Motivating spatial dependence
Spatial externalities
Omitted variables
Unobserved heterogeneity
Introduction
Diagnostics
Spatial externalities
Spatial externalities (spillover) are those growth enhancing elements

of one region that, in their nature of public goods, exert positive (or
negative) eects on other regions, with visable distance decay eects
Empirical verication of such spatial externalities, measurement of

their strength and range requires the specication and estimation of
spatial econometric models
Anselin (2003) proposes a taxonomy of formal models of spatial

externalities. It depends on the way in which spatially lagged
dependent variables (Wy), spatially lagged explanatory variables
(WX) and spatially lagged error terms (Wu) are incorporated in a
regression specication
Anselin L. (2003), Spatial Externalities, Spatial Multipliers
and Spatial Econometrics, International Regional Science
Review, 26, 153-166
Introduction
Diagnostics
Point of departure: classical linear regression model
Vector form
y
i
= +
k
x
ik
k
+
i
i = 1, ..., N (location)
i
iid
_
0,
2
_
Var (
i
|X) =
2
E
_
= 0 i = j
Matrix form
y = i
N
+ X +
E [] = 0 E
_
_
=
2
I
N
OLS
unbiased and ecient (BLUE)
Introduction
Diagnostics
Linear regression model with a spatial autoregressive
disturbance (SEM)
Structural form
y = i
N
+ X + = W + u u iidN
_
0,
2
I
N
_
y
i
= +
k
x
ik
k
+
i

i
=
j
w
ij
j
+u
i
u
i
iid
_
0,
2
_
= spatial autoregressive parameter
Spatial externalities must be analysed by considering the reduced

form:
y = i
N
+ X + (I
N
W)
1
u
Introduction
Diagnostics
Variance-covariance matrix
= (I W)
1
u E
_
uu
=
2
I
N
E
_
=
2
_
(I
N
W)
1
_
I
N
W
_
1
_
= 0
The structure of this variance-covariance matrix is such that every

location is correlated with every other location in the system, but
closest locations more so
Introduction
Diagnostics
Leontief expansion
This can be seen by considering the Leontief expansion of

= (I
N
W)
1
u (when || < 1 )
(I
N
W)
1
= I
N
+ W +
2
W
2
+... (Spatial multiplier )
E
_
=
2
_
I
N
+ W + W
+
2
_
W
2
+WW
+W
2
_
+...
_
Introduction
Diagnostics
Interpretation of SEM
Spatial diusion process of random shocks:

a random shock in a specic location i (i.e. a shock in the error u
at any location i ) does not only aect the outcome y in i but it will
be transmitted to all other locations following the multiplier
expressed in (I
N
W)
1
. Unmodelled eects spill over across
units of observations
Introduction
Diagnostics
Interpretation of SEM
For a spatial weights matrix corresponding to rst order contiguity,

each of the powers involves a higher order of contiguity, in eect
creating bands of ever larger reach around each location, relating
every location to every other one
The powers of the autoregressive parameter ensures that the

covariance decreases with higher order contiguity
Even though W may contain only a few neighbours for each

observation, the variance-covariance matrix is a non-sparse matrix,
representing a global pattern of spatial autocorrelation. Moreover,
unless the number of neighbours is constant for each observation
(knn weights matrix), the diagonal elements in the
variance-covariance matrix will not be constant, resulting in
heteroskedasticity
Introduction
Diagnostics
Omitted variables and SEM
Assume
y = x + z
Consider z not observable

z x
z = Wz + r = (I
N
W)
1
r
r N
_
0,
2
I
N
_
y = x + (I
N
W)
1
r = x + (I
N
W)
1
u
u x
non-spherical disturbances
OLS
still unbiased but not ecient
Introduction
Diagnostics
Unobserved heterogeneity and SEM
Assume
y = a + X
Treat the vector a as a spatially structured random eect vector

(assumption: observational units in close proximity should exhibit
eects levels that are similar to those from neighbouring units)
a = Wa + = (I
N
W)
1
N
_
0,
2
I
N
_
y = x + (I
N
W)
1
Thus, spatial heterogeneity provides another way of motivating

spatial dependence
Introduction
Diagnostics
Spatial Durbin specication or common factor model
Lets write again the reduced form of the SEM

y = X + (I W)
1
u
(I W) y = (I W) X + u
Spatial Durbin model

y = Wy + X WX + u
u N
_
0,
2
I
N
_
Unconstrained structural form

y = Wy + X + WX + u =
Unconstrained reduced form

y = (I
N
W)
1
(X + WX + u)
Introduction
Diagnostics
Omitted variables and SDM
Assume again
y = x + z
Given the prevalence of omitted variables in spatial econometrics, it

is unlikely that u x
Consider z not observable

z = (I
N
W)
1
r
r = x + v
v N
_
0,
2
I
N
_
Introduction
Diagnostics
Omitted variables and SDM
y = x + (I
N
W)
1
(x + v)
y = x + (I
N
W)
1
x + (I
N
W)
1
v
y = Wy + x( + ) + Wx() + v
y = Wy +
1
x +
2
Wx + u
OLS
biased and not ecient
Introduction
Diagnostics
Unobserved heterogeneity and SDM
Again assume
y = a + X
What if a is not independent of X ?
Suppose
= X +
N
_
0,
2
I
N
_
a = Wa + = Wa + X + = (I
N
W)
1
X + (I
N
W)
1
y = x + (I
N
W)
1
(X + )
y = Wy + X ( + ) + WX () + = Wy +
1
x +
2
Wx + u
Introduction
Diagnostics
Spatial lag model (SLM)
It is a formal representation of the equilibrium outcome of processes

of social and spatial interaction among agents occurring over time
Structural form
y = Wy + X + u
u N(0,
2
u
I
N
)
y
i
=
j
w
ij
y
j
+x
i
+ u
i
u
i
N(0,
2
u
)
Reduced form
y = (I
N
W)
1
(X) + (I
N
W)
1
u
E[y|X] = (I
N
W)
1
X
Introduction
Diagnostics
Interpretation of the SLM
Spatial multiplier eect of global interaction eect: the

outcome in a location i will not only be aected by the exogenous
characteristics of i , but also by those in all other locations through
the inverse spatial transformation (I W)
1
:
E [y|X] = X + WX +
2
W
2
X + ...
The powers of matching the powers of W (higher orders of
neighbors) ensure that a distance decay eect is present
Spatial diusion of random shocks: a random shock in a location i

does not only aect the outcome of i , but also has an impact on
the outcome in all other locations through the same inverse spatial
transformation
Introduction
Diagnostics
SARMA model: Kelejian and Prucha (1998)
Structural form
y = W
1
y + i
N
+ X +
= W
2
+ u
u N
_
0,
2
I
N
_
Reduced form
y = (I
N
W
1
)
1
(X + i
N
) + (I
N
W
1
)
1
(I
N
W
2
)
1
u
(I
N
W
1
)
1
(X + i
N
) : familiar spatial multiplier in X
(I
N
W
1
)
1
(I
N
W
2
)
1
u (hard to interpret)
Introduction
Diagnostics
Spatial cross-regressive model
y = X + WX + u
Local externalities : since X is exogenous, also WX is

exogenous and the model can be estimated by OLS
Introduction
Diagnostics
A taxonomy of spatial econometric models
Structural form Reduced form
SEM y = Wy +X WX +u y = X + (I
N
W)
1
u
SDM y = Wy +X +WX +u y = (I
N
W)
1
X + (I
N
W)
1
WX + (I
N
W)
1
u
SLM y = Wy +X +u y = (I
N
W)
1
X + (I
N
W)
1
u
SCM y = X +WX +u
SARMA y = W
1
y +X + (I
N
W
2
)
1
u y = (I
N
W
1
)
1
X + (I
N
W
1
)
1
(I
N
W
2
)
1
u
SEM: Spatial Error Model; SDM: Spatial Durbin Model; SLM:

Spatial Lag Model; SCM: Spatial Cross-Regressive Model
Introduction
Diagnostics
Interpreting parameter estimates: direct and indirect eects
In SLM and SDM, a change in a single observation (region)

associated with any given explanatory variable will aect the region
itself (a direct impact) and potentially aect all other regions
indirectly (an indirect eect) thourgh the spatial multiplier
mechanism
In linear regression models

E [y
i
] /X
ik
=

k
E [y
i
] /X
jk
= 0
Introduction
Diagnostics
Direct and indirect eects in SDM
Direct eect of a change in X

ik
on region i :
E [y
i
] /X
ik
= (I
N
W)
1
ii
_
I
N
k
+ W
k
_
=

It includes the eect of feedback loops where observation i

aects observation j and observation j also aects i. Its
magnitude depends upon: 1) the position of the regions in
space, 2) the degree of connectivity among regions which is
governed by W, 3) the parameters
k
,
k
,
Indirect eect of a change in X

jk
on region i:
E [y
i
] /X
jk
= (I
N
W)
1
ij
_
I
N
k
+ W
r
_
= 0
where (I
N
W)
1
ij
represents the ij th element of the matrix
(I
N
W)
1
Introduction
Diagnostics
Summary measures of impacts (Pace and LeSage, 2009)
SDM
Average total impact (M
k
tot
) N
1
i
N
(I
N
W)
1
_
I
N
k
+W
k
_
i
N
Average direct impact (M
k
dir
) N
1
tr
_
(I
N
W)
1
ii
_
I
N
k
+W
k
__
Average indirect impact (M
k
ind
) M
k
ind
= M
k
tot
M
k
dir
SLM
Average total impact (M
k
tot
) (1 )
1
k
Average direct impact (M
k
dir
) N
1
tr
_
(I
N
W)
1
ii
I
N
k
_
Average indirect impact (M
k
ind
) M
k
ind
= M
k
tot
M
k
dir
Introduction
Diagnostics
Inference on impact measures
- Ecient simulation approaches can be used to produce an empirical
distribution of the paramerters , , , ,
2
that are needed to
calculate the scalar summary measures
- This distribution can be constructed using a large number of
simulated parameters drawn from the multivariate distribution of
the parameters implied by the ML estimates
Introduction
Diagnostics
Interpretation
- If

k
= 0.5 and M
k
dir
= 0.586 , we say that there is a positive
feedback eect equal to 0.086 arising from impacts passing through
neighboring regions and back to the region itself
- If M
k
ind
= 0.243 , we say that there is a positive positive and
signicant spillover eect arising from changes in the variable X
k
- If the model is specied in logged levels, we can interpret the
impacts estimates as elasticities. Thus, we would conclude that a
10% increase in X
k
would result in a 8.29% increase in y . Around
7/10 of this impact comes from the direct eect magnitude of
0.586, and 3/10 from the indirect or spatial spillover impact based
on its scalar impact estimate of 0.243
Introduction
Diagnostics
Course content
Introduction
Diagnostics

Introduction
Diagnostics
Spatially lag model with exogenous variables (SLM)
OLS biased and inconsistent due to the endogenenity of Wy
Maximum likelihood estimation
Instrumental Variables estimation
Spatial Error Model (SEM)
GLS not feasible
Maximum likelihood estimation
Nonparametric covariance matrix estimator

Introduction
Diagnostics
A digression on Maximum Likelihood
What is the probability of observing the data {y

i
} actually observed
as a function of some parameters of the model?
In order to compute this probability, we need a (joined) density

function (L), called likelihood function. Thus, an essential
prerequisite of the ML procedure is the assumption of some stated
family of density functions for {y
i
} or, equivalently, for {
i
}
Assume
i
iidN
_
0,
2
I
N
_
; for each observation i the density is
f (
i
) =
1
2
exp
_

2
i
2
2
_
Introduction
Diagnostics
Considering the entire set of N observations, and assuming iidN

errors, the joint density function is the product of the individual
density functions:
L () = L
_
,
2
_
= f
_
y
1
, ...y
N
| + X,
2
_
L () = L
_
,
2
_
= f
_
y
1
| + X,
2
_
f
_
y
2
| + X,
2
_
... f
_
y
N
| + X,
2
_
L () = L
_
,
2
_
=
N
i =1
1
2
exp
_

2
i
2
2
_
In terms of matrix algebra

L
_
,
2
_
=
1
2
(2)
N/2
exp
_
2
2
_
Introduction
Diagnostics
In logs
ln L
_
,
2
_
=
N
2
log
_
2
2
_
1
2
2
_
_
ln L
_
,
2
_
=
N
2
log (2)
N
2
log
2
1
2
2
_
_
ln L
_
,
2
_
=
N
2
log (2)
N
2
log
2
1
2
2
_
y
y 2
y +
X
_
What values of would make our sample most probable? We need

to maximize L or lnL w.r.t.
Introduction
Diagnostics
To maximize ln L, we need to dierentiate the log-likelihood

function w.r.t. and it will readily be seen that this is equivalent to
the algebra leading to
OLS
:
ML
=
_
X
X
_
1
X
Having found

ML
, we get
ln L
_
,
2
_
=
N
2
log (2)
N
2
log
2
1
2
2
_
y
y 2
y +

_
ln L
_
,
2
_
=
N
2
log (2)
N
2
log
2
1
2
2
_
_
ln L
_
,
2
_
=
N
2
log (2)
N
2
log
2
1
2
2
RSS
Introduction
Diagnostics
Now
ln L
_
,
2
_
2
= 0 =
2
= RSS/N = RSS/ (N k)
(in small sample
2
ML
is biased downward)
For large N, the estimate of

2
obtained by OLS and ML will be
very close. Thus, the ML method is a large sample estimation
method
Introduction
Diagnostics
Asymptotic covariance matrix of MLE
Consider a general likelihood function L ()
The necessary condition for maximizing ln L is:

lnL()
= 0 (score
vector)
Consistency: p lim
ML
= or lim
N
Pr
_
ML
_
= 0
Asymptotic eciency :

ML
is asymptotically ecient, as its variance
achieves the Cramer-Rao lower bound for consistent estimators
(thus, the ML estimator has the strong attraction of having the
smallest asymptotic variance among root-N consistent estimators)
[I ()]
1
=
_
E
_
2
ln L
__
1
I is the expected Fisher information
matrix
Asymptotic normality:

ML
N
_
, [I ()]
1
_
Introduction
Diagnostics
Asymptotic covariance matrix of MLE
If the form of the expected values of the second derivatives of the

log-likelihood is known,
[I ()]
1
=
_
E
_
2
ln L
__
1
can be evaluated at

to estimate the covariance matrix for the ML
estimator
Introduction
Diagnostics
ML estimator for SLM with exogenous variables
y = Wy + X + iidN
_
0,
2
I
N
_
= y Wy X
Under the hypothesis of normality of the error term, the

log-likelihood function for the SLM model is given by:
ln L
_
y|, ,
2
_
=
N
2
ln [2]
N
2
ln
_
+ ln |I
N
W|
1
2
2
_
(y Wy X)
(y Wy X)

Introduction
Diagnostics
First order conditions = analytical solutions for , conditional

upon :
ML
() =
_
X
X
_
1
X
(I
N
W) y
=
_
X
X
_
1
X
y
_
X
X
_
1
X
Wy
= b
0
b
L
b
0
=
_
X
X
_
1
X
y
b
L
=
_
X
X
_
1
X
Wy
Introduction
Diagnostics
First order conditions = analytical solutions for

2
, conditional
upon :
2
ML
() =
1
N
_
y Wy X
ML
()
_
_
y Wy X
ML
()
_
=
1
N
(e
0
e
L
)
(e
0
e
L
)
=
1
N
y
(I
N
W)
M (I
N
W) y
M = I
N
X
_
X
X
_
1
X
(residual maker matrix)

e
0
= y Xb
0
e
L
= Wy Xb
L
Introduction
Diagnostics
Concentrated log-likelihood function
lnL(y|) =
N
2
ln [2] +ln |I W|
N
2
ln
_
(e
0
e
L
)
(e
0
e
L
)
N
_
=
N
2
ln [2] +
N
i =1
(I
i
)
N
2
ln
_
1
N
y
(I W)
M (I W) y
_
Introduction
Diagnostics
Maximizing this is equivalent to minimizing

min
{}
_
y
(I
N
W)
M (I
N
W) y
|I
N
W|
2/N
_
This is also equivalent to

min
{}
_
e
0
e
0
2e
0
e
L
+
2
e
L
e
L
i
(I
N
i
)
_
Need to impose a constraint on the parameter . Anselin and

Florax (1994) point out that the parameter can take on feasible
values in the range
_
1
min
,
1
max
_
. This requires that we constrain
our optimisation search to values of within that range
Introduction
Diagnostics
The estimator is then substituted into the solution for to yield
ML
=
_
X
X
_
1
X
(I
N
W) y
=
_
X
X
_
1
X
y
_
X
X
_
1
X
Wy
= b
0
b
L
Introduction
Diagnostics
Steps for the ML estimation of the SLM
1) Perform OLS for the models

y = X
0
+
0
Wy = X
L
+
L
2) Compute residuals e
0
= y X
0
and e
L
= Wy X
3) Given e
0
and e
L
, nd that maximizes the concentrated
likelihood function
lnL(y|) =
N
2
ln [2] +
i
(I
N

i
)
N
2
ln
_
(e
0
e
L
)
(e
0
e
L
)
N
_
4) Given that maximizes the concentrated ML, compute
L
and
2
=
(e
0
e
L
)
(e
0
e
L
)
N
Introduction
Diagnostics
Inference
An asymptotic variance matrix based on the Fisher information

matrix for the parameters =
_
, ,
2
_
can be used to provide
measures of dispersion for the estimates of and
2
Anselin (1980, page 50) provides the analytical expressions needed

to construct the information matrix
Introduction
Diagnostics
ML estimator for the Spatial Durbin model
SDM : y = X + WX + Wy +
The model may also be written as follows:

y =

X + Wy +
with

X =
_
X WX

Introduction
Diagnostics
ML estimator for the SEM
Specication:
y = X +
= W + u
u iidN
_
0,
2
I
N
_
= (I
N
W)
1
u
O-diagonal cells of the var-cov matrix contain nonzero values and

this violates the conditions for the OLS procedure:
E
_
=
2
1
= (I
N
W)
(I
N
W)
Introduction
Diagnostics
Thus, although
OLS
retains its unbiasedness, inference based on
the usual variance estimate may be misleading
GLS estimator for , conditional on :
GLS
=
_
X
(I
N
W)
(I
N
W) X
_
1
X
(I
N
W)
(I
N
W) y
Associated coecient variance matrix:
Var
_
GLS
_
=
2
GLS
_
X
(I
N
W)
(I
N
W) X
_
1
2
GLS
= N
1
_
_
y X
GLS
_
_
y X
GLS
_
_
Introduction
Diagnostics
FGLS requires consistent estimate for
Usual two-Step FGLS inconsistent
OLS does not yields a consistent estimate in a spatial lag model

and therefore cannot be used to obtain an estimate for from a
regression of the residuals e
OLS
_
y X
OLS
_
on We
OLS
Instead, an explicit numerical optimisation of the likelihood function

must be carried out
Introduction
Diagnostics
The maximum likelihood function for the SEM model is

ln L
_
y|, ,
2
_
=
N
2
ln [2]
N
2
ln
_
2
_
+ln |I
N
W|
1
2
2
_
(y X)
()
1
(y X)
_
Introduction
Diagnostics
The GLS results for and Var () are also ML. Thus, we can use
them to compute the concentrated log-likelihood as a nonlinear
function of the autoregressive parameter
ln L (y|) =
N
2
ln [2] +
N
i =1
(I
N

i
)
N
2
ln
_
e
GLS
(I
N
W)
(I
N
W) e
GLS
_
e
GLS
= y X
GLS
Introduction
Diagnostics
Iterative approach to estimate the SEM
1) Estimate y = X + by OLS and calculate associated residuals
(1)
=
_
X
X
_
1
X
y u
(1)
= y X
(1)
2) Use these residuals to nd a value of that maximizes the

log-likelihood conditional on the
OLS
values
ln L (y|) =
N
2
ln [2]
N
2
ln
_
u
(I
N
W)
(I
N
W) u
_
+
i
(I
N

i
)
3) Updates the values of using the value of determined in step

2):
FGLS
=
_
X
_
I
N

W
_ _
I
N

W
_
X
_
1
X
_
I
N

W
_ _
I
N

W
_
y
Introduction
Diagnostics
Iterative approach to estimating the SEM
This approach is continued until convergence is achieved and we

obtain:
(step k)

(step k1)
and

(step k)

(step k1)
Introduction
Diagnostics
Nonparametric covariance matrix estimator
Kelejian, H.H. and Prucha, I.R. (2007) HAC estimation in a spatial

framework, Journal of Econometrics, 140, pages 131154
The basic idea is to avoid specifying a particular spatial process of a

particular spatial weights matrix and to extract the spatial
covariance terms from weighted averages of cross-products of
residuals, using a kernel function
This yields the so-called heteroskedastic and spatial autocorrelation

(HAC) estimator (similar to Newey-West approach)
A major practical problem is to ensure that the estimated

vaiance-covariance matrix is positive denite
Introduction
Diagnostics
IV-2SLS estimator for the SLM
The endogeneity of the spatially lagged dependent variable can also

be addressed by means of an instrumental variables or 2SLS
approach (Anselin, 1988; Kelejian and Robinson, 1993; Kelejian and
Prucha, 1998)
Structural model
y = Wy + X +
Rewrite the model compactly

y = Q +
where Q = (Wy, X) and = (, )
Introduction
Diagnostics
2SLS estimation of the model using the instruments Z

Wy = Z +
=
_
Z
Z
_
1
Z
Wy
Wy = HWy H = Z
_
Z
Z
_
1
Z
Q =
_
X,

Wy
_
y =

Q +
=
_
Q
_
1
y
Introduction
Diagnostics
As demonstrated in Kelejian and Robinson (1993), the choice of an

instrument for Wy follows from conditional expectation in the
reduced form
E [y|X] = (I
N
W)
1
X
= X + WX +
2
W
2
X + ...
Apart from the exogenous variables X (which are always

instruments), this includes their spatial lags as well, suggesting WX
as a set of instruments
Introduction
Diagnostics
A generalized 2SLS procedure for SARSAR
Kelejian and Prucha (1998)
Structural form
y = Wy + X +
= W + u
Variance-covariance matrix:
= E
_
_
=
2
u
(I
N
W)
1
(I
N
W)
1
Let Z =
_
X, WX, W
2
X, ...
_
the matrix of instruments
Rewrite the model more compactly

y = Q + = W + u
where Q = (Wy, X) and = (, )
Introduction
Diagnostics
Three step procedure
First step: 2SLS estimation of the model using the instruments Z
Second step: GM estimation of using the residuals from the rst

step (based on three moment conditions on u )
Third step
Application of the Cochrane-Orcutt type transformation:

y
= Q
+ u
y
= y
Wy
Q
= Q
WZ
Re-estimation of the regression model after the

Cochrane-Orcutt transformation to account for the spatial
correlation in the residuals
=
_
Q
_
Q
_
_
_
1
Q
_
y
_
_
Introduction
Diagnostics
A list of references for 2SLS and GMM approaches to SLM
Das, D., Kelejian, H.H., Prucha, I.R., 2003. Small sample properties
of estimators of spatial autoregressive models with autoregressive
disturbances. Papers in Regional Science 82, 126
Kelejian, H.H., Prucha, I.R., 1997. Estimation of spatial regression

models with autoregressive errors by two-stage least squares
procedures: a serious problem. International Regional Science
Review 20, 103111
Kelejian, H.H., Prucha, I.R., 1998. A generalized spatial two-stage

least squares procedure for estimating a spatial autoregressive model
with autoregressive disturbances. Journal of Real Estate Finance
and Economics 17, 99121
Introduction
Diagnostics
Kelejian, H.H., Prucha, I.R., 1999. A generalized moments

estimator for the autoregressive parameter in a spatial model.
International Economic Review 40, 509533
Kelejian, H.H., Prucha, I.R., Yuzefovich, E., 2004, Instrumental

variable estimation of a spatial autorgressive model with
autoregressive disturbances: large and small sample results. In:
LeSage, J., Pace, R.K. (Eds.), Spatial and Spatiotemporal
Econometrics, Advances in Econometrics, Vol. 18. Elsevier, New
York, pp. 163198
Lee, L.F., 2001a. Generalized method of moments estimation of

spatial autoregressive processes. Mimeo, Department of Economics,
Ohio State University
Introduction
Diagnostics
Lee, L.F., 2001b. GMM and 2SLS estimation of mixed regressive,

spatial autoregressive models. Mimeo, Department of Economics,
Ohio State University
Lee, L.F., 2002. Consistency and eciency of least squares

estimation for mixed regressive, spatial autoregressive models.
Econometric Theory 18, 252277
Lee, L.F., 2003. Best spatial two-stage least squares estimators for
a spatial autoregressive model with autoregressive disturbances.
Econometric Reviews 22, 307335
Introduction
Diagnostics
Course content
Introduction
Diagnostics

Introduction
Diagnostics
Morans I test of spatial autocorrelation in OLS residuals
With W standardized
I =
e
We
e
e
where e is a vector of OLS residuals
Interpretation not straightforward: while the null hypothesis is

obviously the absence of spatial dependence, a precise expression for
the alternative hypothesis does not exit
Cli and Ord (1972, 1973, 1981) show that the asymptotic
distribution for Morans I based on least-squares residuals
corresponds to a standard normal distribution after having
standardized the I-statistic
Introduction
Diagnostics
Morans I test of spatial autocorrelation in OLS residuals
W standardized
E [I ] = tr (MW) / (N k)
V [I ] =
tr (MWMW
) + tr (MW)
2
+ [tr (MW)]
2
(N k) (N k 2)
{E [I ]}
2
z [I ] =
I E (I )
_
V [I ]
Under H
0
, z
a
N (0, 1)
Introduction
Diagnostics
Likelihood-based tests
ML Tests against spatial error
Classical tests based on log-likelihood, its rst derivative (score)

and its second derivative (information matrix)
Wald (W)
Likelihood ratio (LR)
Lagrange multiplier (LM)
Requirements
W : alternative (SEM model)
LR : both null and alternative
LM : null (OLS residuals) (most conservative)
Asymptotic result : W=LR=LM
Finite sample inequality : WLRLM

Introduction
Diagnostics
Likelihood-based tests
Consider the simple null hypothesis H

0
: =
0
Introduction
Diagnostics
Likelihood ratio test
Dene
=
max L () under the restrictions
max L () without the restrictions
< 1
Consider the simple null hypothesis for a scalar parameter

H
0
: =
0
If H
0
: =
0
is not valid, will be signicantly 1
If H
0
: =
0
is valid, will be close to 1
The LR statistic is dened as

LR = 2 ln
Under H
0
, LR
a

2
1
Introduction
Diagnostics
Wald test
In the simple case H

0
: =
0
, the Wald test veries whether the
dierence
_

0
_
is signicant. If H
0
: = 0
W =
V
__
__
= z
2
Under H
0
, W
a

2
1
Introduction
Diagnostics
Lagrange Multiplier test
The LM test uses a statistic based on the score, S () , of the

unrestricted ML function evaluated in correspondence of
0
. If the
restriction is valid, then the restricted estimator should be near the
point that maximizes the log-likelihood. That is, the slope of the
log-likelihood function should be near zero at the restricted
estimator: S (
0
) = 0
In other words the LM test veries whether the value of S (

0
) is
signicantly dierent from zero
LM = N
1
S
(
0
) I (
0
)
1
S
(
0
)
Under H
0
, LM
a

2
1
Introduction
Diagnostics
LM-error
Only requires estimation of the model under the null
H
0
: no spatial autocorrelation ( = 0)
H
1
: spatial error model ( = 0)
LM
err
=
_
e
We/
2
_
2
/T
where e denotes least-squares residuals and
T = tr (WW) + (W
W)
LM
err
and the square of Morans I are asymptotically equivalent
Under H
0
, LM
a

2
1
Introduction
Diagnostics
Wald and Likelihood ratio tests (SEM vs OLS)
Wald test: Asymptotic t-test on in SEM. Requires only ML

estimates and asymptotic variance
LR test: requires both OLS and ML of SEM model

LR = N
_
ln
2
OLS
ln
2
SEM
_
+ 2
i
ln (1
i
)
with
i
as the eigenvalues of W
Under H
0
, W and LR
a

2
1
Introduction
Diagnostics
LM-lag test statistic
Only requires estimation of the model under the null
H
0
: no spatial autocorrelation ( = 0)
H
1
: spatial lag model ( = 0)
LM
lag
=
_
e
Wy/
2
_
2
/R
R =
_
WX
M
_
WX
_
/
2
OLS
+ tr
_
WW + W
W
_
No connection with Morans I
Under H
0
, LM
a

2
1
Introduction
Diagnostics
Wald and likelihood ratio tests (SLM vs OLS)
Wald test: Asymptotic t-test on in SLM. Requires only ML

estimates
LR test: requires both OLS and ML of spatial lag model

LR = N
_
ln
2
OLS
ln
2
SLM
_
+ 2
i
ln (1
i
)
Under H
0
, LR
a

2
1
Introduction
Diagnostics
Specication-robust LM tests
Local misspecication
LM
err
and LM
lag
are no longer
2
1
under H
0
in the
presence of local misspecication in the form of the other type
of spatial dependence
In the presence of spatial lag dependence, the LM

err
test
against error correlation becomes biased, and, in the presence
of spatial error dependence the LM
lag
test against spatial lag
becomes biased
LM tests will tend to reject H

0
too often
Robust to local misspecication (Anselin and Bera, 1992)

Introduction
Diagnostics
Specication-robust LM tests
Test for spatial error robust to spatial lag: RLM

err
LM
=
_
d
T
2
C
1
d
2
/
_
T
_
1 T
2
C
_
Test for spatial lag robust to spatial error: RLM

lag
LM
=
_
d
2
/
_
C/
2
T
C =
_
WX
M
_
WX
_
+T
2
d
= tr (I
N
W)
1
W +e
We/
2
score of the ML of the SEM
d
= tr (I
N
W)
1
W +e
We/
2
score of the ML of the SLM
Interpretation
LM
err
and LM
lag
are often both highly signicant
Typically, only one of the robust test will be signicant
Signicant one (or most signicant one) points to proper

spatial alternative (error or lag)
Introduction
Diagnostics
Specication search
Types of specication search
A) Forward step-wise strategy
start from constrained models (OLS)
base model selection on diagnostics
B) Backward step-wise strategy
start from unconstrained model
higher-order spatial model
test constraints and proceed to simpler models
common factor constraint

Introduction
Diagnostics
Specication search - Forward
OLS estimation - LM tests
None signicant
Stay with OLS results
LM-error signicant, LM-lag not signicant
Error model
LM-lag signicant, LM-error not signicant
lag model
both LM-error and LM-lag signicant
go with robust tests and select one with highest

signicance as alternative
Introduction
Diagnostics
Practical considerations
Choice of weights important
Spatial dependence and heteroskedasticity related
Importance of distinguishing between lag and error
These are large sample tests

Introduction
Diagnostics
LM error test in spatial lag model
Based on ML-lag residuals
Use full likelihood, constrain = 0 in score and information matrix

LM
|
=
_
e
We/
2
_
2
[T T
A
var ()]
1
T = tr
_
WW + W
W
_
T
A
= tr
_
_
WW + W
W
_
(I W)
1
_
Introduction
Diagnostics
LM lag test in spatial error model
Based on ML-error residuals
Use full likelihood, constrain = 0 in score and information matrix
Dene
B = (I
N
W) and e = ML residuals
H
p
=
tr (WW) + tr
_
BWB
1
_
BWB
1
+ [BWXb]
[BWXb] /
2
=
_
(BX)
BWX
/
2
, tr
_
WB
1
_
BWB
1
+ trWWB
1
, 0
_
LM
|
=
_
e
BWy
_
2
_
H
p
H
var () H
_
1
Introduction
Diagnostics
Example: Regional Economic Growth in Europe
Mankiw et al. (1992)
y
= ln y
0
+ X +
y
: Productivity growth rate
ln y
0
: initial labour productivity
X : vector of structural variables (includes also a constant term)
: vector of iidN errors
Introduction
Diagnostics
Ertur and Koch (2007) propose a modied version of the MRW

growth model (SDM)
y
= ln y
0
+ W ln y
0
+ X + WX + W
y
+
Reduced form:
y
= (I
N
W)
1
ln y
0
+ (I
N
W)
1
W ln y
0
+ (I
N
W)
1
X + (I
N
W)
1
WX + (I
N
W)
1
Thus, the outcome in a location i is inuenced not only by the

exogenous characteristics of i, but also by those in all other locations
through the inverse spatial transformation (I
N
W)
1
. A spatial
diusion process of random shocks appears also in this case
Introduction
Diagnostics
The SEM is specied as:
y
= ln y
0
+ X +
= W + v v iidN
_
o,
2
v
I
N
_
Reduced form:
y
= ln y
0
+ X + WX + (I
N
W)
1
v
Only random shocks diuse across economies, while there are no

substantive spatial externalities. However, the reduced form of the
SEM can also be written as:
y
= ln y
0
W ln y
0
+ X WX + W
y
+ v
Introduction
Diagnostics
This represents a constrained version of the SDM, whose reduced

form implies the existence of substantive spatial externalities. The
restriction can be assessed through the common factor test
Introduction
Diagnostics
Using R functions: Linear estimation of a regional growth
regression Solow model
LinearSolow < lm(gprb log(pr80b) + lninv1b + lnagrib +
lndens emp,data=EUselected1)
summary(LinearSolow)
Estimate Std.Error t value Pr( > |t|)
(Intercept) -0.0016380 0.0024756 -0.662 0.50901
log(pr80b) -0.0118647 0.0009465 -12.535 < 2e-16 ***
lninv1b 0.0007924 0.0003034 2.612 0.00974 **
lnagrib -0.0010129 0.0003701 -2.737 0.00680**
lndens emp 0.0006336 0.0004341 1.459 0.14613
Residual standard error: 0.004737 on 185 degrees of freedom Multiple
R-squared: 0.498, Adjusted R-squared: 0.4872 F-statistic: 45.89 on 4
and 185 DF, p-value: < 2.2e-16
Introduction
Diagnostics
Using R functions: Test spatial dependence for OLS
residuals
# Morans I test for OLS residuals using dierent spatial weights matrices
lm.morantest(LinearSolow,dnb320.listw,resfun=rstudent)
...
lm.morantest(LinearSolow,dnb720.listw,resfun=rstudent)
Introduction
Diagnostics
Using R functions: Global Morans I for regression residuals
> lm.morantest(LinearSolow,dnb720.listw,resfun=rstudent)
data:
model: lm(formula = gprb log(pr80b) + lninv1b + lnagrib +
lndens emp, data = EUselected1)
weights: dnb720.listw
Moran I statistic standard deviate = 5.7305, p-value = 5.006e-09
alternative hypothesis: greater
sample estimates:
Observed Morans I Expectation Variance
0.0680336306 -0.0090199633 0.0001807995
Introduction
Diagnostics
Using R functions: Lagrange multiplier spatial dependence
test for OLS residuals
res < lm.LMtests(LinearSolow, dnb420.listw,test=all)
tres < t(sapply(res, function(x) c(x$statistic, x$parameter,

x$p.value)))
colnames(tres) < c(Statistic, df, p-value)
printCoefmat(tres)
Statistic df p-value
LMerr 15.43620 1.00000 0.0001
LMlag 4.22923 1.00000 0.0397
RLMerr 12.16501 1.00000 0.0005
RLMlag 0.95803 1.00000 0.3277
SARMA 16.39423 2.00000 0.0003
Introduction
Diagnostics
Using R functions: Spatial Durbin model (ML estimates)
The choice of the spatial weight matrix to estimate the SDM: model
uncertainty
Base the choice on the value of the AIC
SDM320 < lagsarlm(formula(LinearSolow),listw=dnb320.listw,
type=mixed,method=eigen,data=EUselected1)
...
SDM1020 < lagsarlm(formula(LinearSolow),listw=dnb1020.listw,
type=mixed,method=eigen,data=EUselected1)
Introduction
Diagnostics
Using R functions
summary(SDM420, correlation=F)
Estimate Std. Error z value Pr(> |z|)
(Intercept) -2.770 78.2676 -0.0354 0.9717645
log(pr80b) -159.016 18.5123 -8.5898 < 2.2e-16
lninv1b 1.973 3.1674 0.6232 0.5331778
lnagrib -12.413 3.7957 -3.2703 0.0010742
lndens emp 9.981 4.3459 2.2968 0.0216307
lag.log(pr80b) 95.960 27.8844 3.4414 0.0005788
lag.lninv1b 18.669 9.7521 1.9144 0.0555658
lag.lnagrib 1.3004 9.5782 0.1358 0.8920039
lag.lndens emp -2.6614 11.9504 -0.2227 0.8237680
Introduction
Diagnostics
Using R functions
Rho: 0.36116, LR test value: 5.2777, p-value: 0.0216
Asymptotic standard error: 0.14576 z-value: 2.4777, p-value:
0.013222
Wald statistic: 6.1392, p-value: 0.013222
Log likelihood: -989.6833 for mixed model
ML residual variance (sigma squared): 1938.6, (sigma: 44.03)
LM test for residual autocorrelation test value: 0.00069044, p-value:
0.97904
Introduction
Diagnostics
Using R functions: Compute average direct and indirect
eects
W < as(as dgRMatrix listw(dnb420.listw),CsparseMatrix)
trMatc < trW(W, type=mult)
trMC < trW(W, type=MC)
SDM420.impact < impacts(SDM420, tr=trMatc,R=200)
summary(SDM420.impact, zstats=TRUE, short=TRUE)
Estimate Direct Indirect Total
log(pr80b) -1.590 -1.578 0.591 -0.987
lninv1b 0.020 0.026 0.297 0.323
lnagrib -0.124 -0.125 -0.049 -0.174
lndens emp 0.100 0.100 0.014 0.115
Introduction
Diagnostics
Using R functions: Spatial lag model (Maximum likelihood
estimates
SAR420 < lagsarlm(formula(LinearSolow), listw=dnb420.listw,
type=lag, method=eigen,data=EUselected1)
summary(SAR420, correlation=F)
Estimate Std.Error z value Pr(< |z|)
(Intercept) -14.317 24.212 -0.591 0.554
log(pr80b) -103.731 14.662 -7.074 1.498e-12
lninv1b 7.535 2.972 2.534 0.011
lnagrib -9.543 3.633 -2.627 0.008
lndens emp 6.245 4.246 1.470 0.141
Introduction
Diagnostics
Using R functions: Spatial lag model (Maximum likelihood
estimates
Rho: 0.19951, LR test value: 3.1106, p-value: 0.077785
Asymptotic standard error: 0.12323
z-value: 1.619, p-value: 0.10544
Wald statistic: 2.6213, p-value: 0.10544
Log likelihood: -998.527 for lag model
AIC: 2011.1, (AIC for lm: 2012.2)
LM test for residual autocorrelation test value: 6.7246, p-value:
0.0095091
Introduction
Diagnostics
Using R functions: Compare SDM and SAR
LR.sarlm(SDM420,SAR420)
Likelihood ratio = 17.6873, df = 4, p-value = 0.00142
Introduction
Diagnostics
Using R functions: Spatial Error model (ML estimates)
error420 < errorsarlm(formula=formula(LinearSolow),
listw=dnb420.listw,method=eigen,data=EUselected1)
summary(error420)
Estimate Std.Error z value Pr(> |z|)
(Intercept) -12.685 23.8353 -0.5322 0.594591
log(pr80b) -136.840 13.6350 -10.0360 2.2e-16
lninv1b 4.066 3.0909 1.3156 0.188311
lnagrib -10.787 3.7492 -2.8773 0.004011
lndens emp 8.4469 4.2607 1.9825 0.047421
Introduction
Diagnostics
Using R functions: Spatial Error model (ML estimates)
Lambda: 0.52865, LR test value: 12.024, p-value: 0.00052526
Asymptotic standard error: 0.12109
z-value: 4.3659, p-value: 1.2662e-05
Wald statistic: 19.061, p-value: 1.2662e-05
Log likelihood: -994.0704 for error model
AIC: 2002.1, (AIC for lm: 2012.2)
Introduction
Diagnostics
Using R functions: Common factor test
LR.sarlm(SDM420,error420)
Likelihood ratio = 8.7741, df = 4, p-value = 0.067
Introduction
Diagnostics
Course content
Introduction
Diagnostics

Introduction
Diagnostics
The spatial expansion method (trend surface): Casetti (1972, 1997)
Geographically weighted regression: Fotheringham, Brunsdon, and

Charlton (2002)
Spatial econometric STAR Models: Pede, Florax, Lambert and Holt

(2010)
Semiparametric spatial additive models: Gress (2004), Basile and

Gress (2004), Basile (2008, 2009)
Introduction
Diagnostics
Spatial expansion (trend surface)
Global model:
y
i
= + x
1i
+... + x
mi
+
i
i is a point in space or a region
It can be expanded by allowing each of the parameters to be a

function of spatial coordinates
i
=
0
+
1
n
i
+
2
e
i
i
=
0
+
1
n
i
+
2
e
i
...
i
=
0
+
1
n
i
+
2
e
i
where n
i
(northing) and e
i
(easting) are the spatial coordinates of
location i
y
i
=
0
+
1
n
i
+
2
e
i
+
0
x
1i
+
1
n
i
x
1i
+
2
e
i
x
1i
+... +
0
x
mi
+
1
n
i
x
mi
+
2
e
i
x
mi
+
i
Introduction
Diagnostics
Spatial expansion (trend surface)
This model can be estimated by OLS or ML (if the model is a

Poisson or a logit regression or if it contains spatial autoregressive
parameters) to get spatial varying parameter estimates
Marginal eects:
y
x
1
=
0
+
1
n +
2
e
Introduction
Diagnostics
Limitations of the spatial expansion method
It displays trend in relationships over space, while obscuring

important local variations
The form of the expansion equations needs to be assumed a priori
The expansion equations must be deterministic to remove problems

of estimation in the terminal model
All three problems can be overcome in GWR

Introduction
Diagnostics
Geographically Weighted Regression
Fotheringham, A.S., Brunsdon, C., and Charlton, M.E., 2002,

Geographically Weighted Regression, Chichester: Wiley;
http://www.nuim.ie/ncg/GWR/index.htm
Introduction
Diagnostics
GWR
Global model
y
i
= a
0
+
k
x
ik
+
i
i : a point in space or a region
OLS estimation:
=
_
X
X
_
1
X
GWR extends the traditional regression framework by allowing local

rather than global parameters to be estimated
y
i
=
0
(n
i
, e
i
) +
k
(n
i
, e
i
) x
ik
+
i
where (n
i
, e
i
) denotes the coordinates of the i -th point in space,
k
(n
i
, e
i
) is a realization of the continuous function
k
(n, e) at
point i
Introduction
Diagnostics
GWR
In the estimation of the GWR model it is assumed that observed

data near to point i have more of an inuence in the estimation of
the
k
(n, e) than do data located farther from i . In essence, the
equation measures the relationships inherent in the model around
each point i
For a given data set, local parameters

k
(n, e) are estimated using
the WLS procedure. The weights w
ij
for j = 1, ...,N, at each
location (n
i
, e
i
) are obtained as a continuous kernel function of the
distance between the point i and the other data points
Introduction
Diagnostics
GWR
Let
=
_
0
(n
1
, e
1
)
1
(n
1
, e
1
)
K
(n
1
, e
1
)
.
.
.
.
.
.
.
.
.
.
.
.
0
(n
n
, e
n
)
1
(n
n
, e
n
)
K
(n
n
, e
n
)
_
_
be the matrix of the local parameters. Each row is estimated by
(i ) =
_
X
T
W (i ) X
_
1
X
T
W (i ) y
where
W (i ) = diag [w
i 1
, w
i 2
, ..., w
in
]
Introduction
Diagnostics
GWR
Several dierent weighting functions can be dened, the more

common kernels being the Gaussian and the bi-square weighting
functions
Gaussian weights
w
ij
= exp
_
d
2
ij
/h
2
_
A modied bi-square function taking into account only the N

nearest neighbours is
w
ij
=
_
1
_
d
ij
/h
i
_
2
_
2
if d
ij
< h
i
w
ij
= 0 otherwise
where h
i
is the N
th
nearest-neighbour distance from i
Introduction
Diagnostics
GWR
This kernel function varies in space and presents an adaptive

bandwidth depending on the data points density. Consequently, the
calibration of the model involves also the choice of N , the number
of data point to be included in the estimation of local parameters
Introduction
Diagnostics
GWR
Introduction
Diagnostics
GWR
Introduction
Diagnostics
GWR
The appropriate bandwidth, or the appropriate value of N , can be

obtained by a least square approach using the cross-validation
criteria
CV =
n
i =1
_
y
i
y
=i
(h
i
)
2
where y
=i
(h
i
) is the tted value of y
i
with the observations for
point i omitted from the calibration process
Introduction
Diagnostics
A critical point
There are parallels between GWR and kernel regression. In

kernel regression, y is modelled as a non-linear function of X
by weighting data in attribute space rather than geographical
space
Only when the two criteria (weighting data in attribute space

and in geographical space) match, we have similar results
With GWR we miss important non-linearities if the data are

not spatially clustered
Introduction
Diagnostics
Spatial econometric STAR Models: Pede et al. (2010)
Pede et al. (2010) investigate nonlinearity in spatial process

models allowing for gradual regime-switching structures in the
form of a smooth transition autoregressive (STAR) process
Pede et al. (2010) also develop a series of tests for identifying

nonlinear structural heterogeneity across space, allowing for
gradual, endogenous regime switching behaviour as a STAR
process
They start by deriving a nonlinearity test for a SARSAR-STAR

model, Next, they derive nonlinearity tests for two nested
models: the spatial lag STAR model and the spatial error
STAR model
The tests are developed in the maximum likelihood framework

focusing on the LM variants
Introduction
Diagnostics
Semiparametric spatial additive models
y
i
= X
+ f
1
(x
1i
) + f
2
(x
2i
) + f
3
(x
3i
, x
4i
) +
Wy
i
+ f
4
(n
i
, e
i
) + ... +
i
A plot of f
4
(n
i
, e
i
) as a surface in the study area indicates spatial
trends in over- or under-prediction of the additive model
Wy
i
is endogeneous
Introduction
Diagnostics
As emphasized by Blundell and Powell (2003) the 2SLS procedure is

not suitable for the estimation of nonparametric and semiparametric
models. In particular, the replacement of the endogenous term with
tted values of the rst stage generally yields inconsistent estimates
of Wy
Blundell and Powell (2003) have proposed a general solution which

is appropriate for the estimation of nonparametric models. This
method consists of extending the control function method to
additive nonparametric models
The control function approach applied to the linear model

y
i
= X
i
+
i
has its antecedent in the interpretation of the 2SLS
estimator

2SLS
as the coecients on X
i
in a OLS regression of y
i
on X
i
and the residuals v
i
from a linear regression of X
i
on a set
of instruments Z
i
Introduction
Diagnostics
Application of the control function approach to nonparametric and

semiparametric settings is straightforward. It consists of two steps
In the rst step, an auxiliary nonparametric regression of the

form Wy
i
= f (X
i
) + g (Z
i
) + v
i
is considered, with Z
i
being
a set of appropriate instruments and v
i
a sequence of random
variables satisfying E (v
i
|Z
i
) = 0
The second step consists of estimating an additive model of

the form
y
i
= X
+ f
1
(x
1i
) + f
2
(x
2i
) + f
3
(x
3i
, x
4i
) +
Wy
i
+ f
4
(n
i
, e
i
) + f
5
( v
i
) + ... +
i
Introduction
Diagnostics
A list of papers on semiparamtric spatial models
Basile R. and Girardi A. (2010), Specialization and Risk Sharing in

European Regions, Journal of Economic Geography, 5, 645-659
Basile R. (2009), Productivity polarization across regions in Europe:

The Role of Nonlinearities and Spatial. International Regional
Science Review, 31, 92-115
Basile R. (2008), Regional Economic Growth in Europe: a

Semiparametric Spatial Dependence Approach. Papers in Regional
Science, 87, 527-544
Basile R. and Gress B. (2005), Semi-parametric Spatial

Auto-covariance Models of Regional Growth Behavior in Europe.
Region et Developpement, 21, 93-118
Arbia G. and Basile R. (2005), Spatial Dependence and

Non-linearities in Regional Growth Behavior in Italy, Statistica, Vol.
65, n. 2: 145-167
Introduction
Diagnostics
Course content
Introduction
Diagnostics

Introduction
Diagnostics
Fixed and Random eects model
Consider a linear model with K independent variables X

y
it
= +x
it
+
it
i = 1,..., N spatial unit, t = 1,..., T time period,
This model does not control for spatial heterogeneity. Space

specic time-invariant variables may aect the dependent variable.
But these variables may be dicult to measure or hard to obtain
risk of obtaining biased results
One remedy:
i
capture the eect of the omitted variables
y
it
=
i
+x
it
+
it
Conditional upon the specication of this variable intercept, the

regression equation can be estimated as a xed eects or random
eects model
Introduction
Diagnostics
Fixed Eects Spatial Lag Model
The FE model extended to a spatially lagged dependent variable is

y
it
=
N
j =1
w
ij
y
jt
+
i
+x
it
+
it
y
t
= Wy
t
+ + X +
t
E (
t
) = 0
E (
t
t
) =
2
I
N
Stability conditions
1/
min
< < 1/
max
Introduction
Diagnostics
Fixed Eects Spatial Error Model
The FE model extended to spatial error autocorrelation is

y
t
= + X
t
+
t
t
= W
t
+
t
E (
t
) = 0
E (
t
t
) =
2
I
N
Stability conditions
1/
min
< < 1/
max
Introduction
Diagnostics
Fixed Eects Spatial Durbin Model
y
t
= Wy
t
+ + X
t
1
+ WX
2
+
t
E (
t
) = 0
E (
t
t
) =
2
I
N
2
= 0 SLM
2
+
1
= 0 SEM
Introduction
Diagnostics
ML estimator of spatial FE and RE models
Elhorst provides Matlab routines at his website

www.regroningen.nl/elhorst for both FE and RE SLM and
SEM
Introduction
Diagnostics
ML estimator of the FE-SLM
The log-likelihood function for the FE-SL model

ln L
_
2
, , ,
i
_
=
NT
2
ln
_
2
2
_
+ T ln (I W)
1
2
2
N
i =1
T
t=1
_
y
it
j =1
w
ij
y
jt
i
x
it
_
2
The partial derivatives of the log-likelihood with respect to

i
are
ln L
i
=
1
2

T
t=1
_
y
it
N
j =1
w
ij
y
jt
i
x
it
_
= 0
Thus, we obtain
i
=
1
T

T
t=1
_
y
it
N
j =1
w
ij
y
jt
x
it
_
Introduction
Diagnostics
FE-SLM
Substituting the solution for

i
into the log-likelihood function, the
concentrated log-likelihood function is obtained
ln L
_
2
, ,
_
=
NT
2
ln
_
2
2
_
+ T ln (I W)
1
2
2
N
i =1
T
t=1
_
y
it
j =1
_
w
ij
y
jt
it

_
2
y
it
= y
it
y
i
_
w
ij
y
jt
= w
ij
y
jt
_
w
ij
y
j
it
= x
it
x
i
Introduction
Diagnostics
FE-SLM
Let b
0
and b
1
denote OLS estimators of regressing Y
and
(I
T
W) Y
on X
, and e
0
and e
1
the corresponding residuals.
The ML estimator of is obtained by maximizing the concentrated
log-likelihood function
ln L () = C + T ln (I W)
NT
2
ln
_
(e
0
e
1
)
(e
0
e
1
)
_
Then, the estimators of

2
and are computed, given the
numerical estimate of
= b
0
b
1
2
=
1
NT
(e
0
e
1
)
(e
0
e
1
)
Finally, the asymptotic variance matrix of the parameters is

computed for inference (Elhorst and Freret, 2007)
Introduction
Diagnostics
FE-SEM
The log-likelihood function corresponding to the demeaned equation

extended to spatial error autocorrelation is
ln L
_
2
, ,
_
=
NT
2
ln
_
2
2
_
+ T ln (I W)
1
2
2

N
i =1
T
t=1
_
y
it
N
j =1
[w
ij
y
jt
]
_
x
it

N
j =1
[w
ij
x
jt
]
_
2
Introduction
Diagnostics
FE-SEM
Given , the ML estimators of and

2
can be solved from their
f.o.c.s, to get
=
_
[X
(I
T
W) X
[X
(I
T
W) X
]
_
1
[X
(I
T
W) X
] [Y
(I
T
W) Y
2
=
e()
e()
NT
where e() = Y
(I
T
W) Y
[X
(I
T
W) X
]
Introduction
Diagnostics
FE-SEM
The concentrated log-likelihood function of takes the form

ln L () = T ln (I W)
NT
2
ln
_
e()
e()
_
Maximizing this function with respect to yields the ML estimator

of , given and
2
. An iterative procedure may be used in
which the set of parameters and
2
and the parameter are
alternately estimated until convergence occurs
The spatial FE can nally be estimated
i
=
1
T
T
t=1
(y
it
x
it
)
Introduction
Diagnostics
Bias correction (Lee and Yu, 2010a)
If SLM, SEM and SDM contain spatial xed eects, but not time
xed eects, the error variance will be biased. This bias can be
easily corrected by
2
BC
=
T
T 1
If SLM, SEM and SDM contain time xed eects, but not spatial
xed eects, the error variance will be biased. This bias can be
easily corrected by
2
BC
=
N
N 1
If SLM, SEM and SDM contain both spatial and time xed eects,
other parameters (
, and

) need to be corrected too
Introduction
Diagnostics
Diagnostics and model selection
LM and LR tests for spatial dependence
See Debarsy N. and Ertur C., Testing for Spatial Autocorrelation in

a xed eects panel data Model, Regional Science and Urban
Economics, 40:6, 453-470, 2010
Introduction
Diagnostics
RE SLM
The RE model extended to a spatially lagged dependent variable is

y
it
=
N
j =1
w
ij
y
jt
+x
it
+ u
it
u
it
=
i
+
it
Introduction
Diagnostics
RE SEM
The RE model extended to spatial error autocorrelation is

y
it
= x
it
+ u
it
u
it
=
N
j =1
w
ij
u
jt
+
i
+
it
Introduction
Diagnostics
RE SLM
The log-likelihood function of the RE spatial lag model is

ln L
_
2
, , ,
_
=
NT
2
ln
_
2
2
_
+ T ln (I W)
1
2
2

N
i =1
T
t=1
_
y
it
N
j =1
[w
ij
y
jt
]
it

_
2
where y
it
= y
it
y
i
_
w
ij
y
jt
= w
ij
y
jt
w
ij
y
jt
x
it
= x
it
x
i
= 1

+T
2
= 1
Introduction
Diagnostics
RE SLM
Given , and
2
, the concentrated log-likelihood function of
takes the form
ln L () =
NT
2
ln
_
e()
e()
_
+
N
2
ln
2
Again an iterative procedure may be used where the set of

parameters , and
2
and the parameter are alternatively
estimated until convergence occurs
Introduction
Diagnostics
RE SEM
The log-likelihood function of the RE spatial error model is

ln L
_
2
, , ,
_
=
NT
2
ln
_
2
2
_
1
2
N
i =1
ln |V| + (T 1)
N
i =1
ln |B|
1
2
2
e
_
1
T

T
T
V
1
_
e
1
2
2
e
_
I
T

1
T

T
T
_
_
B
B
_
e
B = I
N
W
V = T
2
I
N
+
_
B
B
_
1
T
= (T 1) a vector of unit elements
e = y X
2
=
2
/
2
Introduction
Diagnostics
RE SEM
Elhorst (2003) suggests to express ln |V| as a function of the

characterisic roots of W
ln |V| = ln |T
2
I
N
+
_
B
B
_
1
| =
i
ln
_
T +
1
(1
i
)
2
_
Further he suggests to adopt the transformation

y
t
= By
t
+ [P B] y
X
t
= BX
t
+ [P B] X
with P = uppertriangular Choleski decomposition of
_
T
2
I
N
+
_
B
B
_
1
_
1
Introduction
Diagnostics
RE SEM
The log-likelihood function simplies to

ln L =
NT
2
ln
_
2
2
_
1
2
i
ln
_
1 + T (1
i
)
2
_
+T
i
ln (1
i
)
1
2
2
e

Introduction
Diagnostics
RE SEM
The parameters and

2
can be solved from their f.o.c.s
= (X
t
X
t
)
1
(X
t
y
t
)
2
= (NT)
1
T
t=1
e
t
e
Upon substituting

and
2
in the log-likelihood function, the
concentrated log-likelihood function of and
2
is obtained:
ln L
_
,
2
_
= C
NT
2
ln
_
T
t=1
e (, )
t
e (, )
t
_
1
2
N
i =1
ln
_
1 + T (1
i
)
2
_
+ T
N
i =1
ln (1
i
)
Introduction
Diagnostics
RE SEM
One can iterate between and

2
on the one hand, and and
2
on the other, until convergence
The estimator of and

2
, given and
2
, is a GLS estimator
The estimators and

2
, given and
2
, must be solved by
numerical methods because the equations cannot be solved
analytically
Introduction
Diagnostics
Diagnostics and model selection
Random eects versus xed eects
The spatial RE model can tested against the spatial FE model

using Hausmans specication test
Goodness of t
The squared correlation coecient between actual and tted

values is recommended
Introduction
Diagnostics
Direct and indirect eects
The computation of direct and indirect eects are equivalent

of those presented for a cross-section setting
Introduction
Diagnostics
IV-GMM estimation of spatial panel data models
Baltagi B.H. and Liu L. (2011), Instrumental variable

estimation of a spatial autoregressive panel model with
Random eects
Mutl J. and Pfaermayr M. (2010), The Hausman Test in a

Cli and Ord Panel Model, Econometrics Journal, volume 10
(IV-estimators for both FE and RE spatial panels)
Drukker D.M., Egger P., and Prucha I.R. (2010), On

Two-step Estimation of a Spatial Autoregressive Model with
Autoregressive Disturbances and Endogenous Regressors (it is
for cross-section, but it can be helpful)
Introduction
Diagnostics
Dynamic spatial panel model
y
i ,t
= y
i ,t1
+
1
N
j =1
w
ij
y
j ,t
+
2
N
j =1
w
ij
y
j ,t1
+
K
k=1

2k
EX
ki ,t
+
Q
q=1

2q
EN
qi ,t
+
i
+
t
+
it
y
t
= y
t1
+
1
Wy
t
+
2
Wy
t1
+ EX
t
1
+ EN
t
2
+ +
t
+
t
Stability conditions: the characteristic root of the matrix

(I +
2
)(I
1
W)
1
should lie within the unit circle, which
is the case when
< 1 (
1
+
2
)
max
if
1
+
2
0
< 1 (
1
+
2
)
min
if
1
+
2
< 0
1 + (
1
2
)
max
< if
1
2
0
1 + (
1
2
)
min
< if
1
2
< 0
Introduction
Diagnostics
Dynamic spatial panel model
If a model appears to be unstable, that is if the parameter

estimates do not satisfy one of the stationarity conditions, Lee
and Yu (2010) propose to take every variable of the model in
deviation of its spatially lagged value (spatial rst-dierenced
model)
Introduction
Diagnostics
Short-term Direct and indirect eects
Short-term direct eects

_
(I
1
W)
1
(
1k
I )
d : operator that calculates the mean diagonal element of a

matrix
Short-term indirect eects

_
(I
1
W)
1
(
1k
I )
rsum
rsum : operator that calculates the mean row sum of the

non-diagonal elements
Introduction
Diagnostics
Long-term Direct and indirect eects
Long-term direct eects

_
[(1 ) I (
1
+
2
) W]
1
(
1k
I )
_
d
Long-term indirect eects

_
[(1 ) I (
1
+
2
) W]
1
(
1k
I )
_
rsum
Introduction
Diagnostics
Note: the ratio between indirect and direct eects is the same
for every explanatory variables, both in the short term and in
the long term
[
(I
1
W)
1
(
1k
I )
]
rsum
[(I
1
W)
1
(
1k
I )]
d
=
[
(I
1
W)
1
]
rsum
[(I
1
W)
1
]
d
Introduction
Diagnostics
An alternative specication
y
t
= y
t1
+ Wy
t
+ X
t
1
+ WX
t
2
+ +
t
+
t
Elhorst (2010), Jacobs et al. (2011), Brady (2011)

Introduction
Diagnostics
Short-term direct eects

_
(I W)
1
(
1k
I +
2k
W)
Short-term indirect eects

_
(I W)
1
(
1k
I +
2k
W)
rsum
Long-term direct eects

_
[(1 ) I W]
1
(
1k
I +
2k
W)
_
d
Long-term indirect eects

_
[(1 ) I W]
1
(
1k
I +
2k
W)
_
rsum
Introduction
Diagnostics
Estimation methods
Yu et al. (2008) and Lee and Yu ( 2010) have proposed bias

corrected ML estimators for a dynamic model with spatial and time
xed eects
However, these estimators are based on the assumption of only

exogenous covariates except for the time and spatial lag terms
Introduction
Diagnostics
Estimation methods
Kukenova and Monteiro (2009) have suggested to use

System-GMM (Generalized Method of Moments) estimator
(Blundell and Bond, 1998) for dynamic spatial panel model with
several endogenous variables. More specically, they have
investigated the nite sample properties of dierent estimators for
spatial dynamic panel models (namely, spatial ML, spatial dynamic
ML, least-square-dummy-variable, Di-GMM and System-GMM)
and concluded that, in order to account for the endogeneity of
several covariates, spatial dynamic panel models should be
estimated using System-GMM
Introduction
Diagnostics
Papers on spatial panel data
Anselin L, Le Gallo J., Jayet H (2006) Spatial panel econometrics.

In: Matyas L, Sevestre P. (eds) The econometrics of panel data,
fundamentals and recent developments in theory and practice, 3rd
edn. Kluwer, Dordrecht, pp 901-969
Baltagi B.H., Song S.H. and Koh W. (2003), Testing panel data
regression models with spatial error correlation, Journal of
Econometrics, 117, 123-150
Baltagi, B.H., S.H. Song, B.C. Jung, and W. Koh (2007). Testing
for serial correlation, spatial autocorrelation and random eects
using panel data, Journal of Econometrics, 140, 551
Baltagi B., Egger P. and Pfaermayr M. (2007), A Generalized

Spatial Panel Data Model with Random Eects, mimeo
Introduction
Diagnostics
Baltagi B., Liu L. (2011), Instrumental variable estimation of a

spatial autoregressive panel model with Random eects, CPR WP.
no. 127
Bouayad-Agha, S. and Vedrine, L. (2009) Estimation strategies for

spatial dynamic panel using GMM. A new approach to the
convergence issue of European regions, mimeo
Debarsy, N., Ertur C. and J. LeSage, Interpreting dynamic

space-time panel data models, Statistical Methodology, 9,
158-171, 2012
Debarsy N. and Ertur C., Testing for Spatial Autocorrelation in a

xed eects panel data model, Regional Science and Urban
Economics, 40:6, 453-470, 2010
Elhorst, J. P. (2003), Specication and Estimation of Spatial Panel

Data Models. International Regional Science Review 26: 244-268
Introduction
Diagnostics
Elhorst, J. P. (2005a), Unconditional Maximum Likelihhod

Estimation of linear and log-linear Dynamic Models for Spatial
Panels, Geographical Analysis 37, 62-83
Elhorst, J. P. (2005b), Models for dynamic panels in space and

time. An application to regional unemployment in the EU, Paper
presented at the Spatial Econometrics Workshop, April, 8-9, Kiel
Elhorst JP (2009) Spatial Panel Data Models. In Fischer MM, Getis

A (Eds.) Handbook of Applied Spatial Analysis, Ch. C.2. Springer:
Berlin Heidelberg New York
Elhorst JP (2012) Dynamic spatial panels: Models, methods and

inferences. Journal of Geographical Systems 14: 5-28
Introduction
Diagnostics
Hong, E., Sun L. and Li, T. (2008) Location of Foreign Direct

Investment in China: A Spatial Dynamic Panel Data Analysis by
Country of Origin, Discussion Paper 86, Department of Financial &
Management Studies, University of London
Jiwattanakulpaisarn, P., Noland, R.B., Graham, D.J. and Polak,

J.W. (2009), Highway infrastructure and state-level employment: A
causal spatial analysis, Papers in Regional Science, 88, 133-159
Kapoor M. Kelejian H and Prucha I. (2007), Panel data models

with spatially correlated error components, Journal of Econometrics
Kukenova, M. and Monteiro, J.A. (2009) Does Lax Environmental

Regulation Attract FDI when accounting for third-country
eects?. mimeo
Introduction
Diagnostics
Lee, L.F. and Yu, J. (2010a), Estimation of spatial autoregressive

panel data models with xed eects. Journal of Econometrics 154:
165-185
Lee, L.F. and Yu, J. (2010b), Some recent developments in spatial

panel data models. Regional Science and Urban Economics 40:
255-271
Lee, L.F. and Yu, J. (2010c), A spatial dynamic panel data model
with both time and individual xed eects. Econometric Theory, 26,
564-597
Madariaga, N. and Poncet, S. (2007). FDI in Chinese Cities:

Spillovers and Impact on Growth, The World Economy, Blackwell
Publishing, 30, 837-862
Introduction
Diagnostics
Mutl J. and Pfaermayr M. (2010), The Hausman Test in a Cli

and Ord Panel Model, Econometrics Journal, volume 10
Yu, J. and Lee, L. (2009) Convergence: a spatial dynamic panel

data approach, mimeo
Yu, J., de Jong, R. and Lee, L. (2008) Quasi-Maximum Likelihood

Estimators for Spatial Dynamic Panel Data With Fixed Eects
When Both n and T Are Large, Journal of Econometrics, 146,
118-134

SpatEconBasile2012 New

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

SpatEconBasile2012 New

Загружено:

Авторское право:

Доступные форматы

Introduction

Notions of spatial statistics

Notions of spatial statistics

Spatial econometrics: model specication

(Spatially) varying parameters models

Spatial dependence in panel data models

Spatial data are those data which combine attribute information

For example, productivity gures are a-spatial unless the

Geo-statistical data: continuous spatial variation. Example: air

Lattice, regional data (areal or polygonal data):

the domain is xed and discrete

spatial locations are often referred to as sites

we assign to each site one precise spatial coordinate, a

regular polygons (lattice data) and irregular polygons (regional

Point data: spatial component = point coordinates {x, y}. Ex.

Line data (arcs): spatial component = ordered set of N points

Global spatial autocorrelation or spatial dependence:

Positive: locations close to each other exhibit more similar

Negative: high (low) values are sistematically surrounded by

Local spatial autocorrelation:

If none of the two cases occur sistematically, there is no global

Scale eects: dierent results obtained with spatial aggregation

Aggregation or zoning: dierent results obtained with dierent

Once we know the coordinates of two points, we can compute

Arc distance (great-circle distance; takes account of the Earths

It is often more convenient to ignore the curvature of the Earth

Minkowski metrics (a more general form)

Information on spatial data and coordinates are stored in special

A shapele stores geometry and attribute information for the

ESRI (Environmental Systems Research Institute) software is the

Spatial econometrics is the collection of econometric tools dealing

parameter heterogeneity (instability) over space

Interregional knowledge ows, trade, factor movements and so

Unobservable factors (e.g. location amenities) exert an

Measurement errors and unobserved heterogeneity

Administrative boundaries that dont accurately reect the

The presence of spatial dependence violates one of the assumptions

This creates a problem in assessing statistical inference: the errors

spatial econometric models (spatial lag, spatial error, spatial

use data at a dierent spatial scale

include proxy of non-observables

include spatial coordinates and/or spatial dummies

Lack of spatial stability of the relationships under study:

e.g. classications of spatial observation: North and South;

estimate separate models for each group and ask

are the two relations consistent with the data (Chow

is there a trade o between spatial dependence and

other methods: varying parameters, random coecients,

Anselin L. (1988), Spatial Econometrics, Methods and Models.

Anselin L. (2003), Spatial Externalities, Spatial Multipliers and

Anselin L. (2006), Spatial regression, mimeo

Fotheringham, A. S., C. Brunsdon, and M. E. Charlton. 2000.

LeSage J. and Pace R.K. (2009), Introduction to Spatial

GRASS: Geogrpahic Resources Analysis Support System

Arc/Info and ArcView GIS

Spatial Regression Analysis :

SpaceStat (gauss routine)

spdep (R package), written by Roger Bivand

spatial toolbox (Matlab), written by LeSage-Pace

spatreg (Stata), written by Maurizio Pisati

The aggregate Cobb-Douglas production function for region i

This model yields a conditional convergence equation which is

is a diagonal matrix containing scale heterogeneous