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Home » Economic » Econometrics

Bayesian Econometrics

Source: www.econ.iastate.edu
Topic: Econometrics

Sort Desciption: Basic principles of Bayesian statistics and econometrics are reviewed. The topics covered. include point and interval estimation hypothesis testing ...

Content Inside: Bayesian Econometrics Dale J. Poirier University of California - Irvine dpoirier@uci.edu Justin L. Tobias Iowa State University tobiasj@iastate.edu October 2004 Abstract Basic principles of Bayesian statistics and econometrics are reviewed. The topics covered include point and interval estimation hypothesis testing prediction model building and choice of prior. We also review in very general terms recent advances in computational methods and illustrate the use of these techniques with an application. JEL Classifications: C11 C15 C51 1 Introduction Statistics is the study of uncertainty. The Bayesian paradigm interprets probability similarly to ordinary everyday language i.e. as a measure of uncertainty or degree of belief associated with the occurrence of a particular uncertain event given the available information and any accepted assumptions. Degrees of belief can be operationalized into probabilities in terms of reference lotter- ies. 1 Bayesian statistics prescribes how an individual should act in the face of such uncertainty in order to avoid undesirable inconsistencies. 2 Expected utility maximization (or loss minimization) provides a basis for rational decision making and Bayes Theorem describes how beliefs evolve as data are obtained. 3 While the descriptive accuracy of the Bayesian approach in capturing the actual behaviors of individuals is questioned by many opponents Bayesians only claim that the Bayesian view provides normative guidelines for behavior. Bayesian econometrics consists of the tools of Bayesian statistics applicable to economic phenomena. The subjective interpretation of probability is based on an individuals personal assessment of a situation. Accordingly probability is a property of an individuals perception of reality whereas according to objective interpretations probability is a property of reality itself. For subjectivists there are no true unknown probabilities in the world to be discovered. Instead probability ...

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