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Semi-parametric Regression under Model Uncertainty: Economic Applications
Gertraud Malsiner-Walli1, Paul Hofmarcher2, Bettina Grün3
1Department of Finance, Accounting and Statistics Vienna University of Economics and Business (WU) Welthandelsplatz 1 1020 Vienna Austria.
Abstract:
Economic theory does not always specify the functional relationship between dependent and explanatory variables, or even isolate a particular set of covariates. This means that model uncertainty is pervasive in empirical economics. In this paper, we indicate how Bayesian semi-parametric regression methods in combination with stochastic search variable selection can be used to address two model uncertainties simultaneously: (i) the uncertainty with respect to the variables which should be included in the model and (ii) the uncertainty with respect to the functional form of their effects. The presented approach enables the simultaneous identification of robust linear and nonlinear effects. The additional insights gained are illustrated on applications in empirical economics, namely willingness to pay for housing, and cross-country growth regression.
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