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A Nonlinear Panel Model of Cross-sectional Dependence

  • George Kapetanios

    ()

    (Queen Mary, University of London)

  • James Mitchell

    (NIESR)

  • Yongcheol Shin

    (University of Leeds)

This paper proposes a new panel model of cross-sectional dependence. The model has a number of potential structural interpretations that relate to economic phenomena such as herding in financial markets. On an econometric level it provides a flexible approach to the modelling of interactions across panel units and can generate endogenous cross-sectional dependence that can resemble such dependence arising in a variety of existing models such as factor or spatial models. We discuss the theoretical properties of the model and ways in which inference can be carried out. We supplement this analysis with a detailed Monte Carlo study and two empirical illustrations.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp673.pdf
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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 673.

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Date of creation: Nov 2010
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Handle: RePEc:qmw:qmwecw:wp673
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  1. Gregory, Allan W & Smith, Gregor W & Yetman, James, 2001. "Testing for Forecast Consensus," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 34-43, January.
  2. Andros Kourtellos & Chih Ming Tan & Thanasis Stengos, 2008. "THRET: Threshold Regression with Endogenous Threshold Variables," Working Paper Series 05-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
  3. Massimo Guidolin & Stuart Hyde & David McMillan & Sadayuki Ono, 2009. "Non-linear predictability in stock and bond returns: when and where is it exploitable?," Working Papers 2008-010, Federal Reserve Bank of St. Louis.
  4. Itzhak Gilboa & Offer Lieberman & David Schmeidler, 2006. "Empirical Similarity," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 433-444, August.
  5. Kapetanios, G., 1999. "Model Selection in Threshold Models," Cambridge Working Papers in Economics 9906, Faculty of Economics, University of Cambridge.
  6. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
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