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Portfolio Management via Empirical Asset Pricing Powered by Machine Learning

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Part of the Studies in Computational Intelligence book series (SCI,volume 990)

Abstract

In this paper we propose an alternative machine learning forecasting technique for the canonical problem of predicting expected stock returns. The final goal is enhancing the financial performance of the investment product, which in our case refers to a portfolio of equities. We adopt a combination of algorithms, capable of hand-ling high-level abstraction, to study short- and long-term patterns emerging from the analysis of financial factors and market signals. The core of the model adopted to perform the prediction is composed of two independent entities, analyzing short-term dynamics and capturing long-term trends respectively. This adjustment helps us improve the predictive ability of the model in a dynamic environment, where high volatility and noise are intrinsic features. Lastly, we employ an ensemble algorithm that performs an intelligent weighting of each agent’s output. This method allows us to identify the best stocks in terms of performance and to successfully implement quarter-long hold strategies that outperform the selected universe’s equities return benchmark.

Keywords

  • Portfolio management
  • Asset pricing
  • Artificial intelligence
  • Machine learning

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  • DOI: 10.1007/978-3-030-75583-6_12
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Notes

  1. 1.

    Note that when constructing the training set and target set, you incur two phenomena: missing data and noisy data. To overcome the problem of missing data, we apply the method suggested by Beaver et al. [7]. At the same time, we adopt the approach proposed by Steege et al. [8] to handle the noisy data.

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Correspondence to Vittorio Carlei .

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Carlei, V., Terzi, S., Giordani, F., Adamo, G. (2021). Portfolio Management via Empirical Asset Pricing Powered by Machine Learning. In: Bucciarelli, E., Chen, SH., Corchado, J.M., Parra D., J. (eds) Decision Economics: Minds, Machines, and their Society. DECON 2020. Studies in Computational Intelligence, vol 990. Springer, Cham. https://doi.org/10.1007/978-3-030-75583-6_12

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