Abstract

http://ssrn.com/abstract=1570772
 
 

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Modeling the Cross Section of Stock Returns: A Model Pooling Approach


Michael S. O'Doherty


University of Missouri at Columbia - Department of Finance

N. Eugene Savin


University of Iowa - Henry B. Tippie College of Business - Department of Economics

Ashish Tiwari


University of Iowa

August 18, 2011

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Abstract:     
Model selection, i.e., the choice of an asset pricing model to the exclusion of competing models, is an inherently misguided strategy when the true model is unavailable to the researcher. This paper illustrates the advantages of a model pooling approach in characterizing the cross section of stock returns. The optimal pool combines models using the log predictive score criterion, a measure of the out-of-sample performance of each model, and consistently outperforms the best individual model. The bene fits to model pooling are most pronounced during periods of economic stress and it is a valuable tool for asset allocation decisions.

Number of Pages in PDF File: 54

Keywords: Asset pricing, Model pooling, Model combination, Forecasting, Predictive distributions, Log predictive score

JEL Classification: G12, C52, C53

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Date posted: March 15, 2010 ; Last revised: May 6, 2012

Suggested Citation

O'Doherty, Michael S. and Savin, N. Eugene and Tiwari, Ashish, Modeling the Cross Section of Stock Returns: A Model Pooling Approach (August 18, 2011). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1570772 or http://dx.doi.org/10.2139/ssrn.1570772

Contact Information

Michael S. O'Doherty
University of Missouri at Columbia - Department of Finance ( email )
Columbia, MO 65211
United States
Nathan Eugene Savin
University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )
108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0855 (Phone)
Ashish Tiwari (Contact Author)
University of Iowa ( email )
Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)
HOME PAGE: http://www.biz.uiowa.edu/faculty/atiwari
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