Dynamic spatial panel data models with common shocks

Jushan Bai and Kunpeng Li

Journal of Econometrics, 2021, vol. 224, issue 1, 134-160

Abstract: This paper studies dynamic spatial panel data models with common shocks to deal with both weak and strong cross-sectional correlations. Weak correlations are captured by a spatial structure and strong correlations are captured by a factor structure. The proposed quasi-maximum likelihood estimator (QMLE) is capable of handling both types of cross sectional dependence. We provide a rigorous analysis for the asymptotic theory of the QMLE, demonstrating its desirable properties. Heteroskedasticity is explicitly allowed. This is important because QML is inconsistent in the presence of heteroskedasticity while homoskedasticity is imposed. We further show that when heteroskedasticity is estimated, the limiting variance of QMLE is not a sandwich form regardless of normality. Monte Carlo simulations show that the QMLE has good finite sample properties.

Keywords: Panel data models; Spatial interactions; Common shocks; Cross-sectional dependence; Incidental parameters; Maximum likelihood estimation (search for similar items in EconPapers)
JEL-codes: C13 C3 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304407620303961
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:224:y:2021:i:1:p:134-160

DOI: 10.1016/j.jeconom.2020.12.002

Access Statistics for this article

Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

More articles in Journal of Econometrics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().