Sequential Variable Selection as Bayesian Pragmatism in Linear Factor Models

¹ Department of Economics, University of Western Ontario, Ontario, Canada

² Department of Finance, University of Sydney, Sydney, Australia

³ Department of Accounting and Finance, University of Greenwich, London, UK

Abstract

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

KeywordsLinear Factor ModelsBayesian StatisticsSequential Regression

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Sequential Variable Selection as Bayesian Pragmatism in Linear Factor Models

Abstract

References (5)