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

Guowei Cui, Vasilis Sarafidis and Takashi Yamagata

MPRA Paper from University Library of Munich, Germany

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 both N,T tend to infinity, such that N/T converges to a bounded constant. The proposed methodology is employed to study the determinants of risk attitude of banking institutions. The results of our analysis provide evidence that the more risk-sensitive capital regulation that was introduced by the Dodd-Frank Act 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, bank risk behaviour; capital regulation. (search for similar items in EconPapers)
JEL-codes: C33 C36 C38 G21 (search for similar items in EconPapers)
Date: 2020-08-18
New Economics Papers: this item is included in 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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Related works:
Journal Article: IV estimation of spatial dynamic panels with interactive effects: large sample theory and an application on bank attitude towards risk (2023)
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