Evolution of Asset Pricing Approaches

Does the evolution of empirical asset pricing point inevitably to machine learning methods? In his February 2025 paper entitled “From Econometrics to Machine Learning: Transforming Empirical Asset Pricing”, Chuan Shi summarizes the transition from traditional methods to machine learning in empirical asset pricing. He traces the historical development of traditional asset pricing models and their roles as benchmarks for decades of research. He compares the strengths and weaknesses of traditional methods and machine learning, explaining why the latter is well-suited to address challenges of the big data era. Finally, he introduces an approach based on the stochastic discount factor (SDF), melding the simplicity of traditional models and the flexibility/predictive power of machine learning. Based on the body of research on asset pricing, he concludes that: (more…)