Sequential Variable Selection as Bayesian Pragmatism in Linear Factor Models

John Knight, Stephen Satchell and Jessica Zhang
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Stephen Satchell: Trinity College, Cambridge
Jessica Zhang: University of Greenwich

No 1213, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: We examine a popular practitioner methodology used in the construction of linear factor models whereby particular factors are increased/decreased in relative importance within the model. This allows model builders to customise models and, as such, reflect those factors that the client/modeller may think important. We call this process Pragmatic Bayesianism (or prag-Bayes for short) and we provide analysis which shows when such a procedure is likely to be successful.

Keywords: linear factor models; Bayesian statistics; sequential regression (search for similar items in EconPapers)
JEL-codes: C13 C22 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-ecm
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https://eprints.bbk.ac.uk/id/eprint/5946 First version, 2012 (application/pdf)

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