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research article
The Virtue of Complexity in Return Prediction
December 21, 2023
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.
Type
research article
Web of Science ID
WOS:001128501300001
Authors
Publication date
2023-12-21
Publisher
Published in
Volume
79
Issue
1
Start page
459
End page
503
Peer reviewed
REVIEWED
EPFL units
Funder | Grant Number |
Swiss National Science Foundation | |
Available on Infoscience
February 20, 2024
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