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Automated Machine Learning and Asset Pricing

Healy, JV, Gregoriou, A and Hudson, R (2024) Automated Machine Learning and Asset Pricing. Risks, 12 (9).

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Abstract

We evaluate whether machine learning methods can better model excess portfolio returns compared to the standard regression-based strategies generally used in the finance and econometric literature. We examine 17 benchmark factor model specifications based on Expected Utility Theory and theory drawn from behavioural finance. We assess whether machine learning can identify features of the data-generating process undetected by standard methods and rank the best-performing algorithms. Our tests use 95 years of CRSP data, from 1926 to 2021, encompassing the price history of the broad US stock market. Our findings suggest that machine learning methods provide more accurate models of stock returns based on risk factors than standard regression-based methods of estimation. They also indicate that certain risk factors and combinations of risk factors may be more attractive when more appropriate account is taken of the non-linear properties of the underlying assets.

Item Type: Article
Uncontrolled Keywords: 1502 Banking, Finance and Investment; 1503 Business and Management
Subjects: H Social Sciences > HF Commerce > HF5001 Business
Divisions: Liverpool Business School
Publisher: MDPI
SWORD Depositor: A Symplectic
Date Deposited: 18 Sep 2024 13:43
Last Modified: 18 Sep 2024 13:45
DOI or ID number: 10.3390/risks12090148
URI: https://researchonline.ljmu.ac.uk/id/eprint/24178
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