Introduction to Applied

Spatial Econometrics

Attila Varga

DIMETIC Pcs, July 3, 2009

 Prerequisites

Basic statistics (statistical testing)

Basic econometrics (Ordinary Least
Squares and Maximum Likelihood
estimations, autocorrelation)
EU Patent applications 2002
 Outline
Introduction
The nature of spatial data
Modelling space
Exploratory spatial data analysis
Spatial Econometrics: the Spatial Lag and
Spatial Error models
Specification diagnostics
New developments in Spatial Econometrics
Software options
 Spatial Econometrics

A collection of techniques that deal with

the peculiarities caused by space in the
statistical analysis of regional science
models
Luc Anselin (1988)
 Increasing attention
towards Spatial Econometrics in Economics

Growing interest in agglomeration

economies/spillovers (Geographical
Economics)

Diffusion of GIS technology and increased

availability of geo-coded data
 The nature of spatial data

Data representation: time series (time

line) vs. spatial data (map)

Spatial effects:
spatial heterogeneity
spatial dependence
 Spatial heterogeneity
Structural instability in the forms of:

Non-constant error variances (spatial

heteroscedasticity)
Non-constant coefficients (variable
coefficients, spatial regimes)
 Spatial dependence
(spatial autocorrelation/spatial association)
In spatial datasets dependence is present
in all directions and becomes weaker as
data locations become more and more
dispersed (Cressie, 1993)

Toblers First Law of Geography:

Everything is related to everything else,
but near things are more related than
distant things. (Tobler, 1979)
 Spatial dependence
(spatial autocorrelation/spatial association)

Positive spatial autocorrelation: high or

low values of a variable cluster in space

Negative spatial autocorrelation: locations

are surrounded by neighbors with very
dissimilar values of the same variable
EU Patent applications 2002
 Spatial dependence
(spatial autocorrelation/spatial association)

Dependence in time and dependence in

space:
Time: one-directional between two
observations
Space: two-directional among several
observations
 Spatial dependence
(spatial autocorrelation/spatial association)

Two main reasons:

Measurement error (data aggregation)

Spatial interaction between spatial units
 Modelling space
Spatial heterogeneity: conventional non-
spatial models (random coefficients, error
compontent models etc.) are suitable

Spatial dependence: need for a non-

convential approach
 Modelling space
Spatial dependence modelling requires an
appropriate representation of spatial
arrangement

Solution: relative spatial positions are

represented by spatial weights matrices
(W)
 Modelling space
1. Binary contiguity weights matrices
- spatial units as neighbors in different orders
(first, second etc. neighborhood classes)
- neighbors:
- having a common border,
or
- being situated within a
given distance band

2. Inverse distance weights matrices

 Modelling space

Binary contiguity matrices (rook, queen)

0 1 1 0
1 0 1 0
W=
1 1 0 1
0 0 1 0

wi,j = 1 if i and j are neighbors, 0 otherwise

Neighborhood classes (first, second, etc)
 Modelling space
Inverse distance weights matrices

1 1 1
0
( d 1, 2 ) 2 ( d 1, 3 ) 2 ( d 1, 4 ) 2
1 1 1
0
( d 2 ,1 ) 2 (d 2 , 3 ) 2 (d 2 , 4 ) 2
W= 1 1 1
0
( d 3 ,1 ) 2 (d 3, 2 ) 2 (d 3, 4 ) 2
1 1 1
0
( d 4 ,1 ) 2 (d 4 , 2 ) 2 (d 4 , 3 ) 2
 Modelling space
Row-standardization:

Row-standardized spatial weights matrices:

- easier interpretation of results
(averageing of values)
- ML estimation (computation)
 Modelling space

The spatial lag operator: Wy

is a spatially lagged value of the variable y
In case of a row-standardized W, Wy is the
average value of the variable:
in the neighborhood (contiguity weights)
in the whole sample with the weight decreasing
with increasing distance (inverse distance weights)
Exploratory spatial data analysis
Measuring global spatial association:

The Morans I statistic:

a) I = N/S0 [i,j wij (xi -)(xj - ) / i(xi -)2]

normalizing factor: S0 =i,j wij

(w is not row standardized)

b) I* = i,j wij (xi -)(xj - ) / i(xi -)2

(w is row standardized)
 Global spatial association
Basic principle behind all global
measures:

- The Gamma index

= i,j wij cij

Neighborhood patterns and value similarity

patterns compared
 Global spatial association
Significance of global clustering: test
statistic compared with values under H0 of
no spatial autocorrelation

- normality assumption
- permutation approach
 Local indicatiors of spatial
association (LISA)
A. The Moran scatterplot
idea: Morans I is a regression coefficient of a
regression of Wz on z when w is row standardized:
I=zWz/zz
(where z is the variable in deviations from the mean)
- regression line: general pattern
- points on the scatterplot: local tendencies
- outliers: extreme to the central tendency (2 sigma
rule)
- leverage points: large influence on the central
tendency (2 sigma rule)
Moran scatterplot
 Local indicators of spatial
association (LISA)

B. The Local Moran statistic

Ii = zijwijzj

significance tests: randomization approach

 Spatial Econometrics

The spatial lag model

The spatial error model

 The spatial lag model
Lagged values in time: yt-k

Lagged values in space: problem (multi-

oriented, two directional dependence)
Serious loss of degrees of freedom

Solution: the spatial lag operator, Wy

 The spatial lag model

The general expression for the spatial lag model is

y = Wy + x +,

where y is an N by 1 vector of dependent observations, Wy is an N by 1 vector of lagged

dependent observations, is a spatial autoregressive parameter, x is an N by K matrix of

exogenous explanatory variables, is a K by 1 vector of respective coefficients, and is an N by

1 vector of independent disturbance terms.

 The spatial lag model

Estimation

Problem: endogeneity of wy (correlated with

the error term)
OLS is biased and inconsistent
Maximum Likelihood (ML)
Instrumental Variables (IV) estimation
 The spatial lag model

ML estimation: The Log-Likelihood

function

L = ln I - W - N/2 ln (2) - N/2 ln (2) - (y - Wy - x)( y - Wy - x)/2 2

Maximizing the log likelihood with respect to , , and 2 gives the values of parameters
that provide the highest likelihood of the joint occurrence of the sample of dependent variables
 The Spatial Lag model

IV estimation (2SLS)

Suggested instruments: spatially lagged

exogenous variables
 The Spatial Error model

y = x +

with

= W + ,

where is the coefficient of spatially lagged autoregressive errors, W. Errors in are

independently distributed.
 The Spatial Error model

OLS: unbiased but inefficient

ML estimation

The likelihood function for the regression with spatially autocorrelated error term is

L = ln I -W - N/2 ln (2) - N/2 ln (2) - (y - x)(I - W)(y - x)(I - W)/2 2

 Specification tests
Test Formulation Distribution Source

MORAN eWe/ee N(0,1) Cliff and Ord (1981)

2 2
LM-ERR (eWe/s ) /T 2 (1) Burridge(1980)

LM-ERRLAG (eWe/s2)2 / [tr(WW + W2) - tr(WW + W2)A-1 var()] 2 (1) Anselin (1988/B)

LM-LAG (eWy/s2) 2/ (RJ 2 (1) Anselin (1988/B)

LM-LAGERR (e'B'BWy) 2/(H - HVar()H' 2 (1) Anselin et al. (1996)

 Steps in estimation
Estimate OLS
Study the LM Error and LM Lag statistics
with ideally more than one spatial weights
matrices
The most significant statistic guides you to
the right model
Run the right model (S-Err or S-Lag)
 Table 6.2. OLS Regression Results for Log (Innovations) at the MSA Level
(N=125, 1982)

Model Jaffe ML -Spatial Lag Spatial Extended Jaffe

Constant -1.045 -1.098 -1.134 -1.407
(0.146) (0.143) (0.172) (0.212)
W_Log(INN) 0.125
(0.055)
Log(RD) 0.540 0.515 0.504 0.277
(0.054) (0.053) (0.055) (0.057)
Log(RD75) 0.001 -0.027
(0.041) (0.037)
Log(URD) 0.112 0.125 0.132 0.093
(0.036) (0.035) (0.036) (0.034)
Log(URD50) 0.037 0.032
(0.018) (0.015)
Log(LQ) 0.652
(0.163)
Log(BUS) 0.332
(0.057)
Log(LARGE) -0.337
(0.094)
RANK 0.202
(0.101)
R2 - adj 0.599 0.611 0.725
Log-Likelihood -65.336 -62.708 -62.402 -36.683
Kiefer-Salmon 1.899

White 1.183 9.024 37.847

B-P 0.243

LM-Err
D50 1.465 0.000 0.936 0.102
D75 2.688 0.737 2.178 0.060
IDIS2 1.691 0.008 1.102 0.045

LM-Lag
D50 5.620 1.026 0.450
D75 2.968 1.485 1.593
IDIS2 2.039 0.659 0.625

LR-Lag
D50 5.256
Notes: Estimated standard errors are in parentheses; critical values for the White statistic with
respectively 5, 20, and 35 degrees of freedom are 11.07, 31.41, and 49.52 (p=0.05); critical
value for the Kiefer-Salmon test on normality and the Breusch-Pagan (B-P) test for
heteroskedasticity is 5.99 (p=0.05); critical values for LM-Err, LM-Lag and LR-Lag statistics
are 3.84 (p=0.05) and 2.71 (p=0.10); spatial weights matrices are row-standardized: D50 is
distance-based contiguity for 50 miles; D75 is distance-based contiguity for 75 miles; and
IDIS2 is inverse distance squared.

Example: Varga (1998)

 Spatial econometrics:
New developments

Estimation: GMM
Spatial panel models
Spatial Probit, Logit, Tobit
 Study materials
Introductory:
Anselin: Spacestat tutorial (included in the
course material)
Anselin: Geoda users guide (included in the
course material)

Advanced:
Anselin: Spatial Econometrics, Kluwer 1988
 Software options

GEODA easiest to access and use

SpaceStat
R
Matlab routines