Asset Pricing with Panel Tree Under Global Split Criteria / Lin William Cong, Guanhao Feng, Jingyu He, Xin He.

Format:

Book

Author/Creator:

Cong, Lin William.

Contributor:

National Bureau of Economic Research.

Feng, Guanhao.

He, Jingyu.

He, Xin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30805.

NBER working paper series no. w30805

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

We develop a new class of tree-based models (P-Tree) for analyzing (unbalanced) panel data utilizing global (instead of local) split criteria that incorporate economic guidance to guard against overfitting while preserving interpretability. We grow a P-Tree top-down to split the cross section of asset returns to construct stochastic discount factor and test assets, generalizing sequential security sorting and visualizing (asymmetric) nonlinear interactions among firm characteristics and macroeconomic states. Data-driven P-Tree models reveal that idiosyncratic volatility and earnings-to-price ratio interact to drive cross-sectional return variations in U.S. equities; market volatility and inflation constitute the most critical regime-switching that asymmetrically interact with characteristics. P-Trees outperform most known observable and latent factor models in pricing individual stocks and test portfolios, while delivering transparent trading strategies and risk-adjusted investment outcomes (e.g., out-of-sample annualized Sharp ratios of about 3 and monthly alpha around 0.8%).

Notes:

Print version record

December 2022.