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Small sample properties of maximum likelihood versus generalized method of moments based tests for spatially autocorrelated errors

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  • Egger, Peter
  • Larch, Mario
  • Pfaffermayr, Michael
  • Walde, Janette

Abstract

Many applied researchers have to deal with spatially autocorrelated residuals (SAR). Available tests that identify spatial spillovers as captured by a significant SAR parameter, are either based on maximum likelihood (MLE) or generalized method of moments (GMM) estimates. This paper illustrates the properties of various tests for the null hypothesis of a zero SAR parameter in a comprehensive Monte Carlo study. The main finding is that Wald tests generally perform well regarding both size and power even in small samples. The GMM-based Wald test is correctly sized even for non-normally distributed disturbances and small samples, and it exhibits a similar power as its MLE-based counterpart. Hence, for the applied researcher the GMM Wald test can be recommended, because it is easy to implement.

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  • Egger, Peter & Larch, Mario & Pfaffermayr, Michael & Walde, Janette, 2009. "Small sample properties of maximum likelihood versus generalized method of moments based tests for spatially autocorrelated errors," Regional Science and Urban Economics, Elsevier, vol. 39(6), pages 670-678, November.
  • Handle: RePEc:eee:regeco:v:39:y:2009:i:6:p:670-678
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