Consistent specification testing under spatial dependence

Abstract

We propose a series-based nonparametric specification test for a regression function when data are spatially dependent, the 'space' being of a general economic or social nature. Dependence can be parametric, parametric with increasing dimension, semiparametric or any combination thereof, thus covering a vast variety of settings.These include spatial error models of varying types and levels of complexity. Under a new smooth spatial dependence condition, our test statistic is asymptotically standard normal. To prove the latter property, we establish a central limit theorem for quadratic forms in linear processes in an increasing dimension setting. Finite sample performance is investigated in a simulation study and empirical examples illustrate the test with real-world data.