Sequential Variable Selection as Bayesian Pragmatism in Linear Factor Models

John Knight, Stephen Satchell, Jessica Qi Zhang

Department of Accounting and Finance, University of Greenwich, London, UK.
Department of Economics, University of Western Ontario, Ontario, Canada.
Department of Finance, University of Sydney, Sydney, Australia.

DOI: 10.4236/jmf.2013.31A022                

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 Pragmatic Bayesianism (or prag-Bayes for short) and we provide analysis which shows when such a procedure is likely to be successful.

Keywords

Linear Factor Models; Bayesian Statistics; Sequential Regression

Conflicts of Interest

The authors declare no conflicts of interest.

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