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Parameter Estimation and Inference with Spatial Lags and Cointegration

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  • Mutl, Jan

    (EBS Business School, Wiesbaden, Germany)

  • Sögner, Leopold

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

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Abstract

We study dynamic panel data models where the long run outcome for a particular crosssection is affected by a weighted average of the outcomes in the other cross-sections. We show that imposing such a structure implies several cointegrating relationships that are nonlinear in the coefficients to be estimated. Assuming that the weights are exogenously given, we extend the dynamic ordinary least squares methodology and provide a dynamic two-stage least squares estimator. We derive the large sample properties of our proposed estimator and investigate its small sample distribution in a simulation study. Then our methodology is applied to US financial market data, which consist of credit default swap spreads, firm specific and industry data. A "closeness" measure for firms is based on inputoutput matrices. Our estimates show that this particular form of spatial correlation of credit default spreads is substantial and highly significant.

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File URL: http://www.ihs.ac.at/publications/eco/es-296.pdf
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 296.

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Length: 60 pages
Date of creation: May 2013
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Handle: RePEc:ihs:ihsesp:296

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Keywords: Dynamic ordinary least squares; cointegration; credit risk; spatial autocorrelation;

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Cited by:
  1. Mutl, Jan & Sögner, Leopold, 2013. "Parameter Estimation and Inference with Spatial Lags and Cointegration," Economics Series 296, Institute for Advanced Studies.

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