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The Systematic Specification of a Full Prior Covariance Matrix for Asset Demand Equations

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  • Gary Smith

Abstract

Linear expenditure systems are widely used to describe consumption and portfolio decisions. However, the complexity of these models makes estimation a formidable task. In earlier work, an exchangeability assumption was used to incorporate subjective a priori information into the estimation of asset demand equations. Here, an alternative hierarchical approach is described and illustrated. This procedure provides a framework in which the identification of a limited number of distinct reasons for prior uncertainty can be converted into a full prior covariance matrix. Such a matrix can then be combined with prior means and the sample data to yield Bayesian parameter estimates.

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  • Gary Smith, 1981. "The Systematic Specification of a Full Prior Covariance Matrix for Asset Demand Equations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(2), pages 317-339.
    • Handle: RePEc:oup:qjecon:v:96:y:1981:i:2:p:317-339.
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    File URL: http://hdl.handle.net/10.2307/1882393
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    Cited by:

    1. Christopher J. Green & Victor Murinde, 2003. "Flow of funds: implications for research on financial sector development and the real economy," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(8), pages 1015-1036.
    2. Moore, Tomoe & Green, Christopher J. & Murinde, Victor, 2006. "Financial sector reforms and stochastic policy simulations: A flow of funds model for India," Journal of Policy Modeling, Elsevier, vol. 28(3), pages 319-333, April.

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