Stock Returns and the Cross-Section of Characteristics: A Tree-Based Approach

17 Pages Posted: 18 May 2018

See all articles by Guillaume Coqueret

Guillaume Coqueret

EMLYON Business School

Tony Guida

Université de Savoie - Finance and Banking; RAM Active Investments

Date Written: April 27, 2018

Abstract

We build regression trees to determine which firm characteristics are most likely to drive future returns. Out of 30 attributes, those related to momentum appear to have, by far, the most marked impact. This prominence is verified at the sector level as well. The second order effects are propelled by volatility and liquidity variables. Finally, we show that a realistic portfolio strategy based on the short-term RSI characteristic outperforms the naive 1/N portfolio by 2.4% per annum, once the transaction costs have been taken into account. One possible explanation for these higher returns is the immunity of the strategy to the momentum crash phenomenon.

Keywords: Regression trees, Cross-section of stock returns, Firm characteristics, Portfolio choice

JEL Classification: G12, G11, C44, C55

Suggested Citation

Coqueret, Guillaume and Guida, Tony, Stock Returns and the Cross-Section of Characteristics: A Tree-Based Approach (April 27, 2018). Available at SSRN: https://ssrn.com/abstract=3169773 or http://dx.doi.org/10.2139/ssrn.3169773

Guillaume Coqueret (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Tony Guida

Université de Savoie - Finance and Banking ( email )

27 Rue Marcoz
Chambéry, 73011
France

RAM Active Investments ( email )

8 rue du rhone
geneva, 1204
Switzerland

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
387
Abstract Views
1,284
rank
82,678
PlumX Metrics