Abstract
This paper develops a subgraph random effects error components model for network data linear regression where the unit of observation is the node. In particular, it allows for link and triangle specific components, which serve as a basal model for modeling network effects. It then evaluates the potential effects of ignoring network effects in the estimation of the coefficients’ variance-covariance matrix. It also proposes consistent estimators of the variance components using quadratic forms and Lagrange Multiplier tests for evaluating the appropriate model of random components in networks. Monte Carlo simulations show that the tests have good performance in finite samples. It applies the proposed tests to the Call interbank market in Argentina.
Acknowledgement
The author expresses his gratitude to two anonymous reviewers and to Prof. Tong Li for helpful comments and criticisms which have helped greatly improve the paper.
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Research funding: None declared.
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Conflict of interest statement: The author declares no conflicts of interest regarding this article.
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Author contribution: The author has accepted responsibility for the entire content of this submitted manuscript and approved submission.
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