University of Chicago Booth School of Business
5807 S. Woodlawn
Chicago, IL 60637
Institutional Affiliation: University of Chicago Booth School of Business
NBER Working Papers and Publications
|December 2018||Empirical Asset Pricing via Machine Learning|
with Bryan Kelly, Dacheng Xiu: w25398
We synthesize the field of machine learning with the canonical problem of empirical asset pricing: measuring asset risk premia. In the familiar empirical setting of cross section and time series stock return prediction, we perform a comparative analysis of methods in the machine learning repertoire, including generalized linear models, dimension reduction, boosted regression trees, random forests, and neural networks. At the broadest level, we find that machine learning offers an improved description of expected return behavior relative to traditional forecasting methods. Our implementation establishes a new standard for accuracy in measuring risk premia summarized by an unprecedented out-of-sample return prediction R2. We identify the best performing methods (trees and neural nets) and tr...