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

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  • Eduardo Ley

    ()

  • Mark F.J. Steel

    ()

Abstract

We examine the issue of variable selection in linear regression have a potentially large amount of possible covariates and economic theory offers insufficient guidance on how to select the Model Averaging presents 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 addition, we assign a hyperprior to g, as the choice impact on the results. For the prior 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 selection. 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 appl economics, namely cross-country growth regression and returns to schooling. Recommendations to applied users are provided.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws112116.

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Date of creation: Jul 2011
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Handle: RePEc:cte:wsrepe:ws112116

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Keywords: Consistency; Model uncertainty; Posterior odds; Prediction; Robustness;

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  1. Eduardo Ley & Mark F.J. Steel, 2009. "On the effect of prior assumptions in Bayesian model averaging with applications to growth regression This article was published online on 30 March 2009. An error was subsequently identified. This not," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(4), pages 651-674.
  2. Carmen Fernandez & Eduardo Ley & Mark Steel, 1999. "Model uncertainty in cross-country growth regressions," Econometrics 9903003, EconWPA, revised 06 Oct 2001.
  3. Li, Mingliang & Tobias, Justin, 2004. "Returns to Schooling and Bayesian Model Averaging: A Union of Two Literatures," Staff General Research Papers 12011, Iowa State University, Department of Economics.
  4. Fernandez, Carmen & Ley, Eduardo & Steel, Mark F. J., 2001. "Benchmark priors for Bayesian model averaging," Journal of Econometrics, Elsevier, vol. 100(2), pages 381-427, February.
  5. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (Bace) Approach," OECD Economics Department Working Papers 266, OECD Publishing.
  6. Liang, Feng & Paulo, Rui & Molina, German & Clyde, Merlise A. & Berger, Jim O., 2008. "Mixtures of g Priors for Bayesian Variable Selection," Journal of the American Statistical Association, American Statistical Association, vol. 103, pages 410-423, March.
  7. David J. Nott & Robert Kohn, 2005. "Adaptive sampling for Bayesian variable selection," Biometrika, Biometrika Trust, vol. 92(4), pages 747-763, December.
  8. Antonio Ciccone & Marek Jarocinski, 2008. "Determinants of economic growth - will data tell?," Working Paper Series 852, European Central Bank.
  9. Carlos M. Carvalho & Nicholas G. Polson & James G. Scott, 2010. "The horseshoe estimator for sparse signals," Biometrika, Biometrika Trust, vol. 97(2), pages 465-480.
  10. Feldkircher, Martin & Zeugner, Stefan, 2010. "The Impact of Data Revisions on the Robustness of Growth Determinants - A Note on 'Determinants of Economic Growth. Will Data Tell?'," Working Papers in Economics and Finance 2010-12, University of Salzburg.
  11. Martin Feldkircher & Stefan Zeugner, 2009. "Benchmark Priors Revisited: On Adaptive Shrinkage and the Supermodel Effect in Bayesian Model Averaging," IMF Working Papers 09/202, International Monetary Fund.
  12. William A. Brock & Steven N. Durlauf & Kenneth D. West, 2003. "Policy Evaluation in Uncertain Economic Environments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 235-322.
  13. Carmen Fernandez & Mark F. J. Steel, 2004. "Bayesian Regression Analysis with scale mixtures of normals," ESE Discussion Papers 27, Edinburgh School of Economics, University of Edinburgh.
  14. Theo S. Eicher & Chris Papageorgiou & Adrian E. Raftery, 2011. "Default priors and predictive performance in Bayesian model averaging, with application to growth determinants," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(1), pages 30-55, January/F.
  15. Ley, Eduardo & Steel, Mark F.J., 2008. "On the Effect of Prior Assumptions in Bayesian Model Averaging with Applications to Growth Regression," MPRA Paper 6773, University Library of Munich, Germany, revised 06 Jan 2008.
  16. Gneiting, Tilmann & Raftery, Adrian E., 2007. "Strictly Proper Scoring Rules, Prediction, and Estimation," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 359-378, March.
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Cited by:
  1. Gary Koop & Lise Tole, 2011. "Forecasting the European Carbon Market," Working Papers 1110, University of Strathclyde Business School, Department of Economics.

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