Exercise 3.5 Consider the SARAR model: (0, 2 ) e X i i d N e n In and consider the case of l

Exercise 3.5 Consider the SARAR model:

(0, 2 ) e X ≈ i i d N σe n In and consider the case of l = −r. Show that in thiscase the model reduces to a particular case of a Spatial Lag model, discuss the parameter space and comment on the form of the W matrix.

Then derive the variance-covariance matrix of y and the associated likelihood function.

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