Investing Research Articles

What modeling techniques help avoid biases/overfitting in use of machine learning to predict stock returns? In his July 2023 paper entitled “Less is More? Reducing Biases and Overfitting in Machine Learning Return Predictions”, Clint Howard explores how modeling choices affect machine learning as applied to predicting next-month stock returns, as follows: He considers 11 machine… Keep Reading

Does an expectation of an unusually large number of firm defaults in the coming year usefully predict stock and bond market returns? In their May 2023 paper entitled “Systematic Default and Return Predictability in the Stock and Bond Markets”, Jack Bao, Kewei Hou and Shaojun Zhang apply an iterative process to estimate the probability that… Keep Reading

Below is a weekly summary of our research findings for 7/10/23 through 7/14/23. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs. Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list.

Can state-of-the-art artificial intelligence (AI) applications such as GPT-4, trained on the text of billions of web documents, provide sound financial advice? In their June 2023 paper entitled “Using GPT-4 for Financial Advice”, Christian Fieberg, Lars Hornuf and David Streich test the ability of GPT-4 to provide suitable portfolio allocations for four investor profiles: 30… Keep Reading

Do companies that make the strongest commitments to diversity, equity and inclusion (DEI) generate attractive stock returns? In their April 2023 paper entitled “Diversity, Equity, and Inclusion”, Alex Edmans, Caroline Flammer and Simon Glossner relate DEI to future firm performance and stock returns. They measure firm DEI based on 250 confidential employee responses to 13… Keep Reading

Is the ability of the VIX percentile threshold rule described in “Using VIX and Investor Sentiment to Explain Stock Market Returns” to explain future stock market excess return in-sample readily exploitable out-of-sample? To investigate, we test a strategy (VIX Percentile Strategy) that each month holds SPDR S&P 500 ETF Trust (SPY) or 3-month U.S. Treasury… Keep Reading

Do stock market return volatility (as a measure of risk) and aggregate investor sentiment (as a measure of risk tolerance) work well jointly to explain stock market returns? In their June 2023 paper entitled “Time-varying Equity Premia with a High-VIX Threshold and Sentiment”, Naresh Bansal and Chris Stivers investigate the in-sample power an optimal CBOE… Keep Reading

Below is a weekly summary of our research findings for 7/3/23 through 7/7/23. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs. Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list.

How do recent advances in Generative Artificial Intelligence (AI), as epitomized by ChatGPT, impact firm valuations? In their May 2023 paper entitled “Generative AI and Firm Values”, Andrea Eisfeldt, Gregor Schubert and Miao Ben Zhang quantify workforce exposures to AI for publicly traded U.S. companies and translate those exposures into firm valuation effects. Specifically, they:… Keep Reading

Researchers applying machine learning to predict stock returns typically train their models on next-month returns, implicitly generating high turnover that negates gross outperformance. Does training such models on longer-term returns (with lower implicit turnovers) work better? In their June 2023 paper entitled “The Term Structure of Machine Learning Alpha”, David Blitz, Matthias Hanauer, Tobias Hoogteijling… Keep Reading