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research article

The Virtue of Complexity in Return Prediction

Kelly, Bryan
•
Malamud, Semyon  
•
Zhou, Kangying
December 21, 2023
Journal Of Finance

Much of the extant literature predicts market returns with "simple" models that use only a few parameters. Contrary to conventional wisdom, we theoretically prove that simple models severely understate return predictability compared to "complex" models in which the number of parameters exceeds the number of observations. We empirically document the virtue of complexity in U.S. equity market return prediction. Our findings establish the rationale for modeling expected returns through machine learning.

  • Details
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Type
research article
DOI
10.1111/jofi.13298
Web of Science ID

WOS:001128501300001

Author(s)
Kelly, Bryan
Malamud, Semyon  
Zhou, Kangying
Date Issued

2023-12-21

Publisher

Wiley

Published in
Journal Of Finance
Volume

79

Issue

1

Start page

459

End page

503

Subjects

Conditioning Information

•

Premium

•

Sample

•

Predictability

•

Regression

•

Models

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-SM  
FunderGrant Number

Swiss National Science Foundation

Available on Infoscience
February 20, 2024
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/204796
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