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Divergent Priors and well Behaved Bayes Factors

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Author Info

  • Rodney W. Strachan

    (Australian National University, Australia)

  • Herman K. van Dijk

    (Erasmus University Rotterdam, the Netherlands)

Abstract

Divergent priors are improper when defined on unbounded supports. Bartlett's paradox has been taken to imply that using improper priors results in ill-defined Bayes factors, preventing model comparison by posterior probabilities. However many improper priors have attractive properties that econometricians may wish to access and at the same time conduct model comparison. We present a method of computing well defined Bayes factors with divergent priors by setting rules on the rate of diffusion of prior certainty. The method is exact; no approximations are used. As a further result, we demonstrate that exceptions to Bartlett's paradox exist. That is, we show it is possible to construct improper priors that result in well defined Bayes factors. One important improper prior, the Shrinkage prior due to Stein (1956), is one such example. This example highlights pathologies with the resulting Bayes factors in such cases, and a simple solution is presented to this problem. A simple Monte Carlo experiment demonstrates the applicability of the approach developed in this paper.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-006/4.

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Date of creation: 10 Jan 2011
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Handle: RePEc:dgr:uvatin:20110006

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Web page: http://www.tinbergen.nl

Related research

Keywords: Improper prior; Bayes factor; marginal likelihood; Shrinkage prior; Measure;

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References

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  1. Carmen Fernandez & Eduardo Ley & Mark F.J. Steel, 1998. "Benchmark Priors for Bayesian Model Averaging," Econometrics 9804001, EconWPA, revised 31 Jul 1999.
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Cited by:
  1. Tomasz Wozniak, 2012. "Testing Causality Between Two Vectors in Multivariate GARCH Models," Economics Working Papers ECO2012/20, European University Institute.
  2. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2013. "Predictive likelihood comparisons with DSGE and DSGE-VAR models," Working Paper Series 1536, European Central Bank.

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