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Sequential variable selection as Bayesian pragmatism in linear factor models

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

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