Spatial Econometrics

Spatial econometrics is concerned with models for dependent observations indexed by points in a metric space or nodes in a graph. The key idea is that a set of locations can characterize the joint dependence between their corresponding observations. Locations provide a structure analogous to that provided by the time index in time series models. For example, near observations may be highly correlated but, as distance between observations grows, they approach independence. However, while time series are ordered in a single dimension, spatial processes are almost always indexed in more than one dimension and not ordered. Even small increases in the dimension of the indexing space permit large increases in the allowable patterns of interdependence between observations. The primary benefit of this modelling strategy is that complicated patterns of interdependence across sets of observations can be parsimoniously described in terms of relatively simple and estimable functions of objects like the distances between them.