40 minutes
Bernard Fingleton
University of Strathclyde
~ iid (0, 2 )
t 2...T
0.5
0.5
1
1.5
50
100
150
200
250
is an T x 1 vector of disturbances
0
0
1
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
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1
0
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0
0
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0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
1
0
0
0
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0
0
0
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0
1
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
y Wy
Provided Wy and are contemporaneously independent
we can estimate by OLS and get consistent estimates,
although there is small sample bias.
W=
0
0
0
1
0
0
0
0
0
0
0
0
1
1
0
0
0
0
0
0
0
1
0
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1
0
0
0
0
0
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0
0
0
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0
0
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0
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1
0
0
0
0
0
0
0
1
0
1
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
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0
0
0
1
0
0
0
0
1
0
1
0
0
1
0
0
0
0
1
1
0
1
1
0
N= 353
a portion of the W matrix for Luton(1), Mid Bedfordshire(2),
Bedford(3) , South Bedfordshire(4), Bracknell Forest(5),
Reading(6), Slough(7), West Berkshire(8),
Windsor and Maidenhead(9), Wokingham(10)
N= 353
yi f ( Wij y j )
j 1
yk f ( Wkj y j )
j 1
t 1,..., T
ut Wut t
Yt is an N x 1 vector
X t is an N x k vector
is a k x 1 parameter vector
ut is an N x 1 vector of residuals
t is an N x 1 vector of iid innovations
OR
Y X u
u ( IT W )u ( ITN IT W ) 1
Y is a TN x 1 vector etc
Estimation
ML typically used but problems..
No large sample theory
Fails to handle other endogenous variables
on rhs, i.e. excluding spatial lag (Wy)
Assumes normality, or some other specific
distribution, 2SLS/GM robust
ML requires eigenvalues of W matrix, if N
large this may be problematic
Estimation
Typically these models are estimated by ML.
However another very useful method to estimate these models is FGS2SLS
or feasible generalised spatial 2 stage least squares.
The method involves 3 stages.
Stage 1 the model is estimated by 2SLS to obtain .
Stage 2 the resulting 2SLS residuals give and 2 using a GM procedure.
Stage 3 is used to perform a CochraneOrcutttype transformation
to account for the spatial dependence in the residuals,
to obtain .
This is the most sensible single equation estimation method with
endogenous right hand side regressors (in addition to WY) included within X.
Some applications
Fingleton B (2006b) The new economic geography versus urban economics : an
evaluation using local wage rates in Great Britain, Oxford Economic Papers 58 501530
District.s hp
0.416  0.782
0.782  0.96
0.645  0.865
0.96  1.135
0.865  0.992
1.135  1.373
0.992  1.182
1.373  1.883
1.182  1.506
1.506  2.471
~ N (0, 2 )
~ N (0, 2 )
Some applications
Robin Dubin, R. Kelley Pace and Thomas G. Thibodeau Spatial Autoregression
Techniques for Real Estate Data Journal of Real Estate Literature Volume 7, Number 1 /
January, 1999
Abstract
This paper describes how spatial techniques can be used to improve the accuracy of market
value estimates obtained using multiple regression analysis. Rather than eliminating the problem
of spatial residual dependencies through the inclusion of many independent variables, spatial
statistical methods typically keep fewer independent variables and augment these with a simple
model of the spatial error dependence. We discuss alternative spatial autoregression model
specifications, estimation methods, and prediction procedures. An empirical example is provided
in the appendix.
Some applications
Beron K et al (2004) Hedonic price functions and spatial dependence : implications for
the demand for urban air quality, Chapter 12 in Advances in Spatial Econometrics (Eds
Anslin, L Florax R and Rey S) Springer.
Tin 1967 Ronald Ridker and John Henning conducted the first study that linked air pollution to
property prices. ..there seems to be a preponderance of evidence that air pollution is negatively
related to house prices. This is important because it reveals information about the willingness to
pay for air quality a nonmarket commodity. much of the analysis focuses on the hedonic
regressions, wherein some measure of house price is the dependent variable and measures of
the characteristics of housing ; eg living area, existence of a pool, neighbourhood quality, school
district as well as measures of pollution are the independent variables..we are worried that the
potential for misspecifying the role of neighbourhood quality as a determinant of house prices is
high. For us this is relevant to the extent that it may significantly alter the estimate of the air
pollution effect..to analyse these issues we use the tools of spatial econometrics.
Some applications
Kim C W, Phipps, T, Anselin, L (2003) Measuring the benefits of air quality
improvement: a spatial hedonic approach, Journal of Environmental Economics and
Management, 45 2439
Abstract:
The primary objective of this paper is to improve the methodology for estimating hedonic price
functions when the data are inherently spatial. A spatialeconometric hedonic housing price
model is developed and estimated for the Seoul metropolitan area to measure the marginal value
of improvements in SO2 and NOX concentrations. Diagnostic testing favored the spatial lag
model over the spatial error model. Results showed that SO2 pollution levels had a significant
impact on housing prices while NOX pollution did not. The authors attribute this differential impact
to the relatively higher levels of SO2 pollution when compared with pollution standards and the
relative recency of NOX pollution. Marginal WTP for a 4% improvement in mean SO2
concentrations is about $2,333 or 1.4% of mean housing price.
Some applications
Bernard Fingleton and Julie Le Gallo
"Estimating spatial models with endogenous variables, a spatial
lag and spatially dependent disturbances: Finite sample
properties
Papers in Regional Science, Volume 87, Number 3, August 2008.
Some applications
http://www.sml.hw.ac.uk/ecomes/peebles/
Contains Stata data file
Stata do file
Stata log file
N= 353
~ N (0, 2 )
Wij
Ei E j exp(d ij )
E E
i
exp(d ij )
Number of obs
Variance ratio
Squared corr.
Sigma
=
=
=
=
353
0.682
0.686
35.82
p_all_1 
Coef.
Std. Err.
z
P>z
[95% Conf. Interval]
+p_all_1

wdem_0 
.7162038
.0744813
9.62
0.000
.5702231
.8621846
cwdem_0 
.0307249
.0042079
7.30
0.000
.0224775
.0389723
oo  .0005196
.0000951
5.46
0.000
.0007061
.0003331
mkeystage2 
185.0892
19.32967
9.58
0.000
147.2037
222.9746
_cons  704.0562
76.03211
9.26
0.000
853.0764
555.036
+rho 
.7233336
.0632212
11.44
0.000
.5994224
.8472448
Wald test of rho=0:
chi2(1) = 130.904 (0.000)
Likelihood ratio test of rho=0:
chi2(1) = 107.679 (0.000)
Lagrange multiplier test of rho=0:
chi2(1) = 184.967 (0.000)
Acceptable range for rho: 15.394 < rho < 1.000
W* =
0
0
0
1
0
0
0
0
0
0
0
0
1
1
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
1
0
0
0
0
0
0
0
1
0
1
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
1
0
0
0
1
0
0
0
0
1
0
1
0
0
1
0
0
0
0
1
1
0
1
1
0
N= 353
a portion of the W matrix for Luton(1), Mid Bedfordshire(2),
Bedford(3) , South Bedfordshire(4), Bracknell Forest(5),
Reading(6), Slough(7), West Berkshire(8),
Windsor and Maidenhead(9), Wokingham(10)
~
N
(0,
)
Weights matrix
Name: w_contig
Type: Imported (binary)
Rowstandardized: Yes
if j n(i)
otherwise
1
0
Wij*
Wij*
*
ij
Number of obs
Variance ratio
Squared corr.
Sigma
=
=
=
=
353
0.691
0.748
32.15
p_all_1 
Coef.
Std. Err.
z
P>z
[95% Conf. Interval]
+p_all_1

wdem_0 
.3954057
.072845
5.43
0.000
.2526322
.5381792
cwdem_0 
.0275843
.0037148
7.43
0.000
.0203034
.0348651
oo  .0003552
.0000873
4.07
0.000
.0005263
.000184
mkeystage2 
149.9569
17.41933
8.61
0.000
115.8156
184.0981
_cons  541.2713
67.4818
8.02
0.000
673.5332
409.0094
+rho 
.6062885
.0403313
15.03
0.000
.5272407
.6853364
Wald test of rho=0:
chi2(1) = 225.982 (0.000)
Likelihood ratio test of rho=0:
chi2(1) = 152.774 (0.000)
Lagrange multiplier test of rho=0:
chi2(1) = 164.297 (0.000)
Acceptable range for rho: 1.095 < rho < 1.000
Number of obs
F( 4,
348)
Prob > F
Rsquared
Adj Rsquared
Root MSE
=
=
=
=
=
=
353
116.27
0.0000
0.5720
0.5671
42.113
p_all_1 
Coef.
Std. Err.
t
P>t
[95% Conf. Interval]
+wdem_0 
.8640059
.0862467
10.02
0.000
.6943755
1.033636
cwdem_0 
.0577055
.0040977
14.08
0.000
.0496461
.0657649
oo  .0007112
.0001101
6.46
0.000
.0009278
.0004947
mkeystage2 
175.8029
22.70749
7.74
0.000
131.1417
220.4641
_cons  571.8745
88.35934
6.47
0.000
745.6601
398.089

y Wy X
W
is a vector of N x 1 iid innovations
( I W ) 1
hence
y Wy X ( I W ) 1
( I W ) ( iW i ) W 2W 2 3W 3 ...
1
i 0
is the matrix product of W and W, and Wi is the matrix product of Wi1 and W.
Which means a shock at j goes to all other locations.
W0 I , W2
The effect of shock are therefore felt directly within each country receiving a shock, and
there is an indirect effect due to W which affects only those countries linked via the W
matrix (i.e. for which there is a nonzero element on the W matrix). If W was a contiguity
matrix we might think of these as local effects. However the effect of a shock is global,
since it is transmitted also to third party countries that are neighbours of neighbours.
The effect via the higher powers of W is also felt in countries that are not linked via nonzero elements of the W matrix. Note that the effect is not oneway. A shock to a country
affects the neighbours, and the nonneighbours, but these also affect the country from
which the shock emanates. In other words, the full effect of a shock for country k is not
simply the shock itself, but the initial shock plus the feedback from the other countries.
Country.shp
Country.shp
189  542
543  900
901  1502
1503  2902
2903  23281
5000
5000
10000 Miles
http://www.spatialeconometrics.com/
Stata
Some routines forthcoming and available
David Drukker's package. When available, The
package is described here:
http://repec.org/snasug08/drukker_spatial.pdf.
Course
Second "Spatial Econometrics Advanced Institute"
that will be held again in Rome in AmyJune 2009.
The deadline for applications is the end of January.
All the details may be found at the website
Www.Spatialeconometricsadvancedinstitute.org
books
Anselin L (1988) Spatial Econometrics: Methods
and Models. Dordrecht : Kluwer.
Anselin L (2001) Spatial Econometrics, in B. Baltagi
(ed) A Companion to Theoretical Econometrics,
Blackwell: Oxford, 310330
Anselin L (2006) 'Spatial econometrics' in TC Mills
and K Patterson (eds) Palgrave Handbook of
Econometrics : vol 1 Econometric theory Palgrave:
Macmillan 2006 901969