Using Bayesian Variable Selection Methods to Choose Style Factors in Global Stock Return Models

Abstract

This paper applies Bayesian variable selection methods from the statistics literature to give guidance in the decision to include/omit factors in a global (linear factor) stock return model. Once one has accounted for country and sector, it is possible to see which style or styles best explains current asset returns. The study suggests that global style is not an important component once country and sector have been accounted for.