Federal ID: 91-6001537
ISSN: 0022-1090 (Print) | 1756-6916 (Online)
Estimating Stock Market Betas via Machine Learning
Wolfgang Drobetz, Fabian Holstein, Tizian Otto, and Marcel Prokopczuk
♦ Machine learning-based market beta estimators outperform established benchmark models both statistically and economically. Analyzing the predictability of time-varying market betas of U.S. stocks, we document that machine learning-based estimators produce the lowest forecast and hedging errors. They also help create better market-neutral anomaly strategies and minimum variance portfolios. Among the various techniques, random forests perform best overall. Model complexity is highly time-varying. Historical stock market betas, turnover, and size are the most important predictors. Compared to linear regressions, allowing for nonlinearity and interactions significantly improves predictive performance.
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