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Sequential Variable Selection as Bayesian Pragmatism in Linear Factor Models

Author

Listed:
  • John Knight

    (Department of Economics, University of Western Ontario)

  • Stephen Satchell

    (Trinity College, Cambridge
    Department of Finance, University of Sydney)

  • Jessica Zhang

    (University of Greenwich)

Abstract

We examine a popular practitioner methodology used in the construction of linear factor models whereby particular factors are increased/decreased in relative importance within the model. This allows model builders to customise models and, as such, reflect those factors that the client/modeller may think important. We call this process Pragmatic Bayesianism (or prag-Bayes for short) and we provide analysis which shows when such a procedure is likely to be successful.

Suggested Citation

  • John Knight & Stephen Satchell & Jessica Zhang, 2012. "Sequential Variable Selection as Bayesian Pragmatism in Linear Factor Models," Birkbeck Working Papers in Economics and Finance 1213, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:1213
    as

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    File URL: https://eprints.bbk.ac.uk/id/eprint/5946
    File Function: First version, 2012
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    References listed on IDEAS

    as
    1. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(3), pages 279-292, September.
    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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