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

Guowei Cui, Vasilis Sarafidis () and Takashi Yamagata

No 11/20, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

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

Keywords: panel data; instrumental variables; state dependence; social interactions; common factors; large N and T asymptotics (search for similar items in EconPapers)
JEL-codes: C33 C36 C38 C55 (search for similar items in EconPapers)
Pages: 35
Date: 2020
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-ore and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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