Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for March 2024 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for March 2024 (Final)
1st ETF 2nd ETF 3rd ETF

Causal Discovery Applications in Stock Investing

February 8, 2024 • Posted in Equity Premium, Investing Expertise

Can causal discovery algorithms (which look beyond simple statistical association, and instead consider all available data and allow for lead-lag relationships) make economically meaningful contributions to equity investing? In their December 2023 paper entitled “Causal Network Representations in Factor Investing”, Clint Howard, Harald Lohre and Sebastiaan Mudde assess the economic value of a representative score-based causal discovery algorithm via causal network representations of S&P 500 stocks for three investment applications:

  1. Generate causality-based peer groups (e.g., to account for characteristic concentrations) to neutralize potentially confounding effects in long-short equity strategies across a variety of firm/stock characteristics.
  2. Create a centrality factor represented by returns to a portfolio that is each month long (short) peripheral (central) stocks.
  3. Devise a monthly network topology density market timing indicator.

Using daily and monthly data for S&P 500 stocks and monthly returns for widely used equity factors during January 1993 through December 2022, they find that: (more…)

Please or subscribe to continue reading...
Gain access to hundreds of premium articles, our momentum strategy, full RSS feeds, and more!  Learn more

Daily Email Updates
Login
Questions?