Asset Pricing with Neural Networks: A Variable Significant Test

40 Pages Posted: 3 Apr 2020 Last revised: 24 Jul 2020

Date Written: March 12, 2020

Abstract

To facilitate crossing from the "black box" to "glass box" in the application of neural networks (NNs), we develop a variable significant test for the multi-layer perceptrons. To derive the test statistic and its asymptotic distribution, we provide the consistency of the multi-layer perceptrons via the method of sieves. We apply the proposed test to identify the most significant predictors in forecasting equity risk premium. The main results show the superiority of NN relative to the linear regression for forecasting excess returns benchmarking against naive zero forecasts. Furthermore, the most significant predictors are inflation, percent equity issuing, and default return spread.

Keywords: Asset Pricing; Risk Premium; Neural Networks; Variable Significant Test

JEL Classification: C1, C5

Suggested Citation

Fallahgoul, Hasan A and Franstianto, Vincentius, Asset Pricing with Neural Networks: A Variable Significant Test (March 12, 2020). Available at SSRN: https://ssrn.com/abstract=3553253 or http://dx.doi.org/10.2139/ssrn.3553253

Hasan A Fallahgoul (Contact Author)

Monash University ( email )

Clayton Campus
Victoria, 3800
Australia

HOME PAGE: http://www.hfallahgoul.com

Vincentius Franstianto

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
53
Abstract Views
572
rank
410,782
PlumX Metrics