Translator Disclaimer
December 2020 Monotonic effects of characteristics on returns
Jared D. Fisher, David W. Puelz, Carlos M. Carvalho
Ann. Appl. Stat. 14(4): 1622-1650 (December 2020). DOI: 10.1214/20-AOAS1351

Abstract

This paper considers the problem of modeling a firm’s expected return as a nonlinear function of its observable characteristics. We investigate whether theoretically-motivated monotonicity constraints on characteristics and nonstationarity of the conditional expectation function provide statistical and economic benefit. We present an interpretable model that has similar out-of-sample performance to black-box machine learning methods. With this model, the data provide support for monotonicity and time variability of the conditional expectation function. Additionally, we develop an approach for characteristic selection using loss functions to summarize the posterior distribution. Standard unexplained volume, short-term reversal, size, and variants of momentum are found to be significant characteristics, and there is evidence this set changes over time.

Citation

Download Citation

Jared D. Fisher. David W. Puelz. Carlos M. Carvalho. "Monotonic effects of characteristics on returns." Ann. Appl. Stat. 14 (4) 1622 - 1650, December 2020. https://doi.org/10.1214/20-AOAS1351

Information

Received: 1 June 2019; Revised: 1 March 2020; Published: December 2020
First available in Project Euclid: 19 December 2020

MathSciNet: MR4194241
Digital Object Identifier: 10.1214/20-AOAS1351

Rights: Copyright © 2020 Institute of Mathematical Statistics

JOURNAL ARTICLE
29 PAGES

This article is only available to subscribers.
It is not available for individual sale.
+ SAVE TO MY LIBRARY

SHARE
Vol.14 • No. 4 • December 2020
Back to Top