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

Eduardo Ley and Mark Steel

MPRA Paper from University Library of Munich, Germany

Abstract: We examine the issue of variable selection in linear regression modeling, 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: 2011-12-23
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Mixtures of g-priors for Bayesian model averaging with economic applications (2012)
Working Paper: Mixtures of g-priors for bayesian model averaging with economic applications (2011)
Working Paper: Mixtures of g-priors for Bayesian Model Averaging with economic application (2011)
Working Paper: Mixtures of g-priors for Bayesian model averaging with economic applications (2010)
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