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Mixtures of g-priors for Bayesian model averaging with economic applications

Eduardo Ley and Mark Steel ()

Journal of Econometrics, 2012, vol. 171, issue 2, 251-266

Abstract: We examine the issue of variable selection in linear regression modelling, where we have a potentially large amount of possible covariates and economic theory offers insufficient guidance on how to select the appropriate subset. In this context, Bayesian Model Averaging presents a formal Bayesian solution to dealing with model uncertainty. Our main interest here is the effect of the prior on the results, such as posterior inclusion probabilities of regressors and predictive performance. We combine a Binomial-Beta prior on model size with a g-prior on the coefficients of each model. In addition, we assign a hyperprior to g, as the choice of g has been found to have a large impact on the results. For the prior on g, we examine the Zellner-Siow prior and a class of Beta shrinkage priors, which covers most choices in the recent literature. We propose a benchmark Beta prior, inspired by earlier findings with fixed g, and show it leads to consistent model selection. The effect of this prior structure on penalties for complexity and lack of fit is described in some detail. Inference is conducted through a Markov chain Monte Carlo sampler over model space and g. We examine the performance of the various priors in the context of simulated and real data. For the latter, we consider two important applications in economics, namely cross-country growth regression and returns to schooling. Recommendations to applied users are provided.

Keywords: Complexity penalty; Consistency; Model uncertainty; Posterior odds; Prediction; Robustness (search for similar items in EconPapers)
JEL-codes: C11 O47 (search for similar items in EconPapers)
Date: 2012
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Related works:
Working Paper: Mixtures of g-priors for bayesian model averaging with economic applications (2011) Downloads
Working Paper: Mixtures of g-priors for Bayesian model averaging with economic applications (2011) Downloads
Working Paper: Mixtures of g-priors for Bayesian Model Averaging with economic application (2011) Downloads
Working Paper: Mixtures of g-priors for Bayesian model averaging with economic applications (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:171:y:2012:i:2:p:251-266

DOI: 10.1016/j.jeconom.2012.06.009

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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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