Spatial Panel Data Model with error dependence: a Bayesian Separable Covariance Approach

Samantha Leorato and Maura Mezzetti ()

No 338, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: A hierarchical Bayesian model for spatial panel data is proposed. The idea behind the proposed method is to analyze spatially dependent panel data by means of a separable covariance matrix. Let us indicate the observations as yit, i = 1,...,N regions and t = 1,...,T time, var(y), the covariance matrix of y is written as a Kronecker product of a purely spatial and a purely temporal covariance. On the one hand, the structure of separable covariances dramatically reduces the number of parameters, while on the other, the lack of a structured pattern for spatial and temporal covariances permits to capture possible unknown dependencies (both in time and space). The use of the Bayesian approach allows to overcome some of the difficulties of the classical (MLE or GMM based) approach. We present two illustrative examples: the estimation of cigarette price elasticity and of the determinants of the house price in 120 municipalities in the Province of Rome.

Keywords: Bayesian Inference; Kronecker Product; Separable Covariance Matrix; Inverted Wishart Distribution; Spatial-Temporal Dependence (search for similar items in EconPapers)
JEL-codes: C11 C23 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-04-09, Revised 2015-04-09
New Economics Papers: this item is included in nep-ecm and nep-ure
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