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Original Title: Regression Bayes

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Specifically, it is the expected value in the conditional distribution of one given the other. If the variates are X

and Y it is EX\Y y as a function of y or EY\X x as a function of x.

Let us examine the components of Bayes’ theorem as expressed

using several simple examples. We shall initially restrict ourselves to cases in which the parameter 𝛉 is scalar

and not vector valued and we shall consider only situations where each observation is also scalar. This will be

rather artificial since in almost all econometric applications the parameter has several, possibly many,

dimensions – even in our consumption income example the parameter (, ) had two dimensions and, as we

remarked before,

most economic models involve relations between several variables. Moreover the

examples use rather simple functional forms and these do not do justice to the

full flexibility of modern Bayesian methods. But these restrictions have the great

expositional advantage that they avoid computational complexity and enable us to

show the workings of Bayes’ theorem graphically.

The components of Bayes’ theorem are the objects appearing in (1.4). The object

on the left, p(\y), is the posterior distribution; the numerator on the right contains

the likelihood, p(y\), and the prior p(). The denominator on the right, p(y), is

called the marginal distribution of the data or, depending on the context, the predictive

distribution of the data. It can be seen that it does not involve and so for purposes

of inference about it can be neglected and Bayes’ theorem is often written as

p(\y) p(y\)p() (1.5)

where the symbol means “is proportional to.” This last relation can be translated

into words as “the posterior distribution is proportional to the likelihood times the

prior.” We shall focus here on the elements of (1.5).

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