Estimating expected returns with forecast combinations
Year: 2021
Type: dissertation
Abstract: This thesis proposes to apply forecasts produced by expert aggregation as novel predictor of expected returns to 2 different portfolio strategies: 1) mean-variance as proposed by (Markowitz, 1952) and 2) shrinkage of the covariance matrix S as in (Ledoit, 2004). Experts were built by generating forecasts with quantile regression as in generalized random forests and automatised versions of exponential smoothing and ARIMA. This study evaluates the predictive performance of two forecast combination algorithms 1) ML-Prod and 2) ML-Poly using a simulation study, before applying the superior method to a portfolio scenario. After evaluating prediction accuracy, the superior ML-Poly algorithm was chosen to forecast expected returns and showed promising out-of-sample results for the considered portfolios, returning superior values for the selected performance parameter and only marginal inferior results in terms of turnover ratio. Using the simulation study, the results of the portfolios were also validated.
Author: Robert Charles Richter
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3197383828