Publikationen

Unsere Forschungergebnisse unterstützen die gesellschaftliche Debatte rund um aktuelle finanzökonomische Fragestellungen. Durch die Veröffentlichung der Arbeiten in internationalen Fachzeitschriften und unserer Working Paper Series sollen diese für einen möglichst breiten Adressatenkreis zugänglich werden.

HFRC Working Paper Series

Unsere Arbeitspapiere fassen die neuesten Ergebnisse aus der Forschungsarbeit des Instituts zusammen. Die Papiere stellen Diskussionsbeiträge dar und sollen zur kritischen Kommentierung der Ergebnisse anregen.

Alle Working Papers

Machine Learning

Forecasting stock market crashes via machine learning

Hubert Dichtl, Wolfgang Drobetz, Tizian Otto
HFRC Working Paper Series | Version 03/2022
This paper uses a comprehensive set of variables from the five largest Eurozone countries to compare the performance of univariate and machine learning-based multivariate models in predicting stock market crashes. In terms of statistical predictive performance, a support vector machine-based prediction model outperforms a random classifier and is superior to the average univariate benchmark as well as a multivariate logistic regression. The ability to forecast stock market crashes out-of-sample translates into large value-added for active investors. Incorporating nonlinear and interactive effects is both imperative and foundation for the predictive performance of support vector machines compared to their linear benchmark. It enables identify and explain the complex relationships in the underlying economic conditions that precede large stock market declines. Our findings can help forecast financial fragility and deteriorating macroeconomic outcomes.

Empirical asset pricing via machine learning: Evidence from the European stock market

Wolfgang Drobetz, Tizian Otto
Journal of Asset Management | 11/2021 | Forthcoming
This paper evaluates the predictive performance of machine learning methods in forecasting European stock returns. Compared to a linear benchmark model, interactions and nonlinear effects help improve the predictive performance. But machine learning models must be adequately trained and tuned to overcome the high dimensionality problem and to avoid overfitting. Across all machine learning methods, the most important predictors are based on price trends and fundamental signals from valuation ratios. However, the models exhibit substantial variation in statistical predictive performance that translate into pronounced differences in economic profitability. The return and risk measures of long-only trading strategies indicate that machine learning models produce sizeable gains relative to our benchmark. Neural networks perform best, also after accounting for transaction costs. A classification-based portfolio formation, utilizing a support vector machine that avoids estimating stock-level expected returns, performs even better than the neural network architecture.

Estimating security betas via machine learning

Wolfgang Drobetz, Fabian Hollstein, Tizian Otto, Marcel Prokopczuk
HFRC Working Paper Series | Version 10/2021
This paper evaluates the predictive performance of machine learning techniques in estimating time-varying betas of US stocks. Compared to established estimators, tree-based models and neural networks outperform from both a statistical and an economic perspective. Random forests perform the best overall. Machine learning-based estimators provide the lowest forecast errors. Moreover, unlike traditional approaches, they lead to truly ex-post market-neutral portfolios. The inherent model complexity is strongly time-varying. The most important predictors are various historical betas as well as fundamental turnover and size signals. Compared to linear regressions, interactions and nonlinear effects enhance the predictive performance substantially.

Predictability and the cross section of expected returns: Evidence from the European stock market

Wolfgang Drobetz, Rebekka Haller, Christian Jasperneite, Tizian Otto
Journal of Asset Management | 11/2019
This paper examines the cross-sectional properties of stock return forecasts based on Fama–MacBeth regressions using all firms contained in the STOXX Europe 600 index during the September 1999–December 2018 period. Our estimation approach is strictly out of sample, mimicking an investor who exploits both historical and real-time information on multiple firm characteristics to predict returns. The models capture a substantial amount of the cross-sectional variation in true expected returns and generate predictive slopes close to one, i.e., the forecast dispersion mostly reflects cross-sectional variation in true expected returns. The return predictions translate into high value added for investors. For an active trading strategy, we find strong market outperformance net of transaction costs based on a variety of performance measures.