The benefits of tree-based models for stock selection

The identification of the primary drivers of stock returns has been of great interest to both financial practitioners and academics alike for many decades. Influenced by classical financial theories such as the CAPM (Sharp, 1964; Lintner, 1965) and APT (Ross, 1976), a linear relationship is conventionally assumed between company characteristics as derived from their financial accounts and forward returns. Whilst this assumption may be a fair approximation to the underlying structural relationship, it is often adopted for the purpose of convenience. It is actually quite rare that the assumptions of distributional normality and a linear relationship are explicitly assessed in advance even though this information would help to inform the appropriate choice of modelling technique. Non-linear models have nevertheless been applied successfully to the task of stock selection in the past (Sorensen et al, 2000). However, their take-up by the investment community has been limited despite the fact that researchers in other fields have found them to be a useful way to express knowledge and aid decision-making..

Liquiditätsorientierter Ansatz zur dynamischen Vermögensallokation: Erkenntnisse aus dem deutschen Aktienmarkt

Fluctuations in market-wide liquidity may offer opportunities of earning illiquidity premiums. For the US stock market, an investment strategy that profitably exploits these market-wide liquidity fluctuations is proposed by Xiong (J Portf Manag 39(3):102–111, 2013), who focus on an in-sample analysis. In this article, we firstly replicate the liquidity-driven investment strategy of Xiong (J Portf Manag 39(3):102– 111, 2013) for the German stock market showing that a successful harvesting of illiquidity premiums is possible as well. Secondly, we extend the study design of Xiong (JPortfManag39(3):102–111,2013)inthatweconductastrictout-of-sampleanalysis. Our results show that the initial superior in-sample results drastically deteriorate in an out-of-sample framework rendering the practical application of the liquidity-driven investment strategy for the German stock market impossible. Lastly, we modify the rather static investment methodology by a novel approach in which the asset allocation responds flexibly to market-wide liquidity fluctuations. This modification leads to significant performance improvements.36537929Novembe

Searching for inefficiencies in exchange rate dynamics

This paper develops a new pair trading method to detect inefficiencies in exchange rates movements and arbitrage opportunities using a convergence/divergence indicator (CDI) belonging to the oscillatory class. The proposed technique is applied to 11 exchange rates over the period 2010-2015, and trading rules based on CDI signals are obtained. The CDI indicator is shown to outperform others of the oscillatory class and in some cases (for EURAUD and AUDJPY) to generate profits. The suggested approach is of general interest and can be applied to different financial markets and assets