Loss Functions in Restricted Parameter Spaces and Their Bayesian Applications (1706.02104v3)

Abstract: Squared error loss remains the most commonly used loss function for constructing a Bayes estimator of the parameter of interest. However, it can lead to sub-optimal solutions when a parameter is defined in a restricted space. It can also be an inappropriate choice in the context when an extreme overestimation and/or underestimation results in severe consequences and a more conservative estimator is preferred. We advocate a class of loss functions for parameters defined on restricted spaces which infinitely penalize boundary decisions like the squared error loss does on the real line. We also recall several properties of loss functions such as symmetry, convexity, and invariance. We propose generalizations of the squared error loss function for parameters defined on the positive real line and on an interval. We provide explicit solutions for corresponding Bayes estimators and discuss multivariate extensions. {Four} well-known Bayesian estimation problems are used to demonstrate inferential benefits the novel Bayes estimators can provide in the context of restricted estimation.