#10166. The use of spatial models: Examples from Financial Market Applications

September 2026publication date
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Abstract:
Spatial econometrics has been used in many areas in the social sciences including financial studies. However, its application is heavily criticized for several reasons. This chapter aims to highlight the common mistakes in the empirical applications of spatial models while providing examples from financial market studies. For this purpose, first, the spatial model selection process and the interpretation of the obtained coefficients are examined. These two issues are often misunderstood and confused with the non-spatial models. Second, the determination of the spatial weight matrices in the spatial models which represent the distance among the units of analysis is investigated. There is no a-priori theory to guide for the determination of spatial weight matrices, so different studies employ different distance definitions. Although this part directly influences the results obtained from the models, many applications overlook the construction process. In this chapter, the use of weight matrices in financial market studies is also explained. By highlighting these issues once more, this study guides the practitioners who want to use spatial models in their analysis.
Keywords:
Coefficient interpretation; Distance definitions; Financial market studies; Spatial model selection

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