Estimation of the spatial weighting matrix for regular lattice data -- An adaptive lasso approach with cross-sectional resampling

Abstract: Spatial econometric research typically relies on the assumption that the spatial dependence structure is known in advance and is represented by a deterministic spatial weights matrix. Contrary to classical approaches, we investigate the estimation of sparse spatial dependence structures for regular lattice data. In particular, an adaptive least absolute shrinkage and selection operator (lasso) is used to select and estimate the individual connections of the spatial weights matrix. To recover the spatial dependence structure, we propose cross-sectional resampling, assuming that the random process is exchangeable. The estimation procedure is based on a two-step approach to circumvent simultaneity issues that typically arise from endogenous spatial autoregressive dependencies. The two-step adaptive lasso approach with cross-sectional resampling is verified using Monte Carlo simulations. Eventually, we apply the procedure to model nitrogen dioxide ($\mathrm{NO_2}$) concentrations and show that estimating the spatial dependence structure contrary to using prespecified weights matrices improves the prediction accuracy considerably.