Economics Letters 28 (1988) 335-341

North-Holland
335
A TEST FOR SPATIAL AUTOCORRELATION IN SEEMINGLY UNRELATED
REGRESSIONS *
Luc ANSELIN
University of California, Santa Barbara, CA 93106, USA
Received 19 May 1988
Accepted 6 July 1988
A Lagrange multiplier test is proposed for spatial autocorrelation in the error term of the equations in a seemingly unrelated
regression (SUR) model. This test extends approaches developed for single equation models to the SUR context.
1. Introduction
Spatial econometrics is a subfield of applied econometrics concerned with complications in
estimation and testing that may result from the presence of spatial dependence and spatial
heterogeneity [e.g., Paelinck and Klaassen (1979) Ancot et al. (1986) and Anselin (1988b)]. These
complications are typically encountered in empirical analyses of cross-sectional data in regional
science and urban economics.
A common problem is the lack of independence of the regression disturbance term as a
consequence of spatial spill-over effects (spatial externalities), and the arbitrariness of the boundaries
of aggregate spatial units of observation (e.g., states, counties). This special case of a non-spherical
disturbance is commonly referrred to as spatial autocorrelation, and may lead to misleading
inference.
In the context of a single equation specification, spatial autocorrelation is well understood. For
example, a well-known test for its presence in a regression error term is the Moran coefficient [Cliff
and Ord (1981) Ring (1987)]. Although the same effect would also tend to be present in a panel data
context, when observations are pooled across space and over time, it is typically ignored. Extensions
of the Moran coefficient to a space-time situation have been suggested, but lack rigorous distribu-
tional properties and therefore cannot be used in a formal model specification.
In regional econometric modeling the data often consist of cross-sections for a small number of
time periods (e.g., a few decennial censuses), or a cross-section of cross-sections (e.g., employment by
county for different sectors). In this situation a seemingly unrelated regression (SUR) is typically the
specification of choice. It is sometimes called a spatial SUR, since the equations pertain to
cross-sections.
In this note, I outline an asymptotic test for spatial autocorrelation in the error of a spatial SUR
based on the Lagrange multiplier principle. The test is an extension of the procedures introduced in
Anselin (1988a) in a single equation context. As shown in that paper, standard simplifying results for
LM tests with time series data [e.g., Breusch and Pagan (1980) Davidson and MacKinnon (1984)] do
* The research on which this paper is based was supported by Grant SES-8600465 from the National Science Foundation.
0165-1765/88/$3.50 0 1988, Elsevier Science Publishers B.V. (North-Holland)
not hold for spatial models. due to the multidirectional nature of the dependence in space, and the
resulting complex structure of the Jacobian in the likelihood function. Therefore, a derivation is
necessary that takes into account the special problems encountered in the spatial domain.
2. Spatial SUR with spatial error autocorrelation
The formal specification of a spatial SUR model with spatial error autocorrelation consists of T
equations, one for each time period (or sector, product, etc.):
where the index r is used to refer to each equation. Alternatively, in stacked form, all equations can
be summarized as
where Y is an NT by 1 vector of dependent variables, X is a block diagonal matrix of dimensions
NT by K, j3 is the overall coefficient vector of dimension K by 1. and 6 is an NT by 1 error vector.
The presence of spatial dependence in the error term for each eq. can be expressed as a spatial
autoregression,
where X, is the associated spatial autoregressive parameter, w is a weight matrix that reflects the
spatial pattern of dependence (with zero diagonal terms), and p, is a spherical error term. In this
general specification the spatial parameter and the spatial weight matrix are allowed to differ for
each equation. The dependence between equations is in the usual SUR form:
where uts is the error covariance between equation t and s, combined in a matrix 2 for all t, s.
The spatially dependent error vector c, can be expressed as a transformation of the independent
CL, as
Consequently, it follows that
where, for notational simplicity,
B, = (1 - h,W,).
The inverse error covariance for the full system, aPi, takes the form
0-l = B'(Z-' Q I)B, (8)
L. Anselin / Spatial autocorrelation in seemingly unrelated regressions
331
where B is a blockdiagonal NT by NT matrix with the B, as diagonal elements, and @ is the
Kronecker product.
Under the assumption of normality, the log-likelihood function (ignoring constants) for the model
in stacked form is
L= -(1/ 2)lnIQl-(1/ 2)(Y-Xp)Q-(Y-Xp),
(9)
which becomes, after some straightforward matrix manipulations:
L= -(N/ 2)lnIZl+Z, lnIB,I-(1/2)(Y-XP)B[Z-@I]B(Y-XP).
(10)
Estimation necessitates a non-linear optimization of this likelihood and is not further considered
here.
3. A Lagrange multiplier test for spatial error autocorrelation
A Lagrange multiplier (LM) or score test for the presnece of spatial error autocorrelation is
equivalent to a test for the null hypothesis H,: X = 0, where h is a T by 1 vector which contains the
h, coefficients for each equation. Following the standard LM approach, the coefficient vector is
partitioned as
8= [~ldl, (11)
where u contains the upper triangular elements of 2.
The test statistic is constructed in the usual fashion, as
LM= dId,
(12)
where d is the score vector and I1t is the partitioned inverse of the information matrix that
corresponds to the coefficients in X, both evaluated under the null hypothesis.
Based on the log-likelihood (lo), the score for each h, is
a.c/ax,= -tr Y(I-x,w,)- +EB(E-1 caI,,,)(z?~ rq)]c,
(13)
where E is a T by T matrix of zeros, except for a one in position t, t.
Under the null hypothesis, h, = 0 and thus B, = I. Also, since y has zero diagonal elements by
convention, tr K = 0, and thus (13) becomes
aL/ax,=c[(P. Et) @ w+,
(14)
which can be expressed succintly, for all T A,, as (in row form):
l(P*uur),
(15)
where L is a T by 1 vector of ones, U is an N by T matrix with the error vector for each equation
corresponding to the columns, U,_ is a similar matrix of spatially lagged errors (w . ct), and * stands
for the Hadamard product.
338 L. Anselin / Spatial autocorrelation in seemingly unrelated regressions
In contrast to the situation with serial error autocorrelation in the time domain [e.g., Magnus
(1978, p. 311)], the information matrix in the spatial SUR model is not block diagonal between the
parameters X and u. This is due to the multidirectional nature of the dependene in space and the
structure of the Jacobian.
The relevant elements of the information matrix can be found in the usual way from the second
partial derivatives of (10) as:
ICAt
uhk) = tr( EZ-Ehk) . tr D,,
(16)
where E is as before, and E hk is a T by T matrix of zeros, except for elements h, k and k, h,
which equal one. The matrices E and Ehk are used to select the relevant elements from the inverse
Y. The matrix D, is introduced for notational simplicity, and equals
D,= W,(-A,W,)-.
(17)
In general, the expression for this information submatrix will be non-zero. However, under the null
hypothesis of h, = 0, D, becomes equal to W,. Therefore the trace of D, becomes zero, and so does
(16). As a result, the elements for the partitioned information matrix needed in (12) can be found
from the corresponding elements for X,, h,<only. These are
Z(h,, X,)=tr(D,)2+of-a,,-trD,D,,
(18)
I ( A,, A,) = urs. u,,~. tr D,D,r,
(19)
where CT and a,, are the t, s elements of 2-l and 2, respectively. Under the null, these expressions
become
Io( A,, A, 1 = tr Wt2 + ~7. a,, . tr( WW),
(20)
1,(X,, X,) =u.u,~. tr(WW,).
(21)
Or, in matrix form, for all T parameters,
&(A, A) = T,, + T,:(Ii-*x),
(22)
where T,, is a diagonal T by T matrix with as elements tr W,*, and T,, is a symmetric T by T matrix
with as elements tr YW,.
After substituting (15) and (22) in (12) the full expression for the LM test statistic for spatial error
autocorrelation in the spatial SUR model becomes
LM = I$--I*UL$)[~, + T,,;(E-*z)] -(z-*uu,$,
(23)
which is distributed asymptotically as x2 with T degrees of freedom. The special cases where the A,,
the W, or both are the same in each equation can be found as a straightforward extension.
L. Anselin / Spatial autocorrelation in seemingly unrelaied regressions 339
4. Concluding remarks
The test presented here has well-known asymptotic properties, in contrast to the various ad hoc
procedures that are sometimes suggested. Also, since the LM approach is based on estimation under
the null hypothesis only, no special non-linear optimization is needed. The statistic can therefore be
constructed fairly easily from the output of a SUR estimation in a regression package, by means of
standard matrix operations that are increasingly available in commercial econometric software.
Appendix: Extended derivations
Al. Special matrix manipulations used in the score (eq. 13)
For the SUR model with spatially dependent errors, the matrix ti can be expressed as
which is a special case of the model considered in Magnus (1978). More specifically, the special
structure considered by Magnus (1978) is of the form C5 = Q(E @A)Q. The estimation equations for
the parameters p, 2 and h can be found by applying the conditions given in Magnus (1978) [see also
Anselin (1988b)].
Since B is a block diagonal matrix with elements (Z - h(w), its partial derivative with respect to a
particular h, consists of - W, in the t, t block on the diagonal, and zeros elsewhere, or
aB,/px, = - w, for h = t,
= 0, for h f t
which yields.
as/ax, = -E Q W,,
with E defined as in the paper.
Also, as a direct application of matrix calculus,
AZ. The elements of the information matrix (eqs. 18-19)
As pointed out above, the information matrix for the ML estimator can be derived as a special
case of the results in Magnus (1978) for a parameterized non-spherical error variance. There, the
information matrix for the general model with a(O), where B is a vector of parameters, is of the form
\k, = (i/2) tr[(auf/ae,)n(afi-/ae,)s2]
for all combinations of 8, and 8, in 0.
340 L. Anselin / Spatial uutocorrelation in seemingly unrelated rrgressrons
In the spatial SUR model, the information matrix is block diagonal between the elements of fi
and those of [A, a]. The result for p is the usual XQ2X. The important elements of the
information matrix for the parameters in s2 (A and a), say q, are
*( A, A)=tr K, K, + tr K, ' ( Z - ' c3Z) K, ( 2 @Z) ,
*( A, u) = tr K, ' ( 2p1Eh" @I ) ,
*(a. u) = (1/ 2)N- tr(XPE)(ZPEh),
with i, j, h, k, as the relevant elements of the coefficient vectors, E defined as before, and K as an
auxiliary matrix for each element A, of A. In the spatial SUR model, K, becomes
K, =( M/ X+B- '
= - E" @ W, ( Z- X, W, ) - - '
The expressions needed to derive \ k(X, A) and Ik(h, a) can be obtained by using the simplifying
notation D, = W, ( Z - X, W, ) - ' and the following intermediate results:
= (Elf. E" ) ~3 ( D, Q) ,
or,
K, KS=O, for tfs,
=E" @( D, ) ' , for t=s,
tr K, K, = [ tr Er r ] . [ t r ( D, ) ' ] .
= tr( D, ) 2,
K, ( X- ' Ehh @, I ) =( E" @ D, ' ) ( z- ' E' %Z) ,
tr K, ' ( F' Eh" @f ) = [tr( Er r Z p' Ehl ) ] . [tr D,].
L. Anselin / Spatial autocorrelation in seeming~v unrelated regressions 341
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