Stock Picking with Machine Learning

42 Pages Posted: 23 Jun 2020 Last revised: 19 May 2021

See all articles by Dominik Wolff

Dominik Wolff

Deka Investment GmbH; Darmstadt University of Technology; Frankfurt University of Applied Sciences

Fabian Echterling

Deka Investment GmbH

Date Written: April 22, 2020

Abstract

We combine insights from machine learning and finance research to build machine learn-ing algorithms for stock selection. Our study builds on weekly data for the historical constitu-ents of the S&P 500 over the period from January 1999 to March 2021 and includes typical equity factors as well as additional fundamental data, technical indicators, and historical re-turns. Deep neural networks (DNN), long short-term neural networks (LSTM), random forest, gradient boosting, and regularized logistic Regression models are trained on stock characteris-tics to predict whether a specific stock outperforms the market over the subsequent week. We analyze a trading strategy that picks stocks with the highest probability predictions to outper-form the market. Our empirical results show a substantial and significant outperformance of machine learning based stock selection models compared to a simple equally weighted bench-mark. Moreover, we find non-linear machine learning models such as neural networks and tree-based models to outperform more simple regularized logistic regression approaches. The re-sults are robust when applied to the STOXX Europe 600 as alternative asset universe. However, all analyzed machine learning strategies demonstrate a substantial portfolio turnover and trans-action costs have to be marginal to capitalize on the strategies.

Keywords: Investment Decisions, Equity Portfolio Management, Stock Selection, Stock Picking, Machine Learning, Neural Networks, Deep Learning, Long Short-Term Neural Networks (LSTM), Random Forest, Boosting

JEL Classification: G11, G17, C58, C63

Suggested Citation

Wolff, Dominik and Wolff, Dominik and Echterling, Fabian, Stock Picking with Machine Learning (April 22, 2020). Available at SSRN: https://ssrn.com/abstract=3607845 or http://dx.doi.org/10.2139/ssrn.3607845

Dominik Wolff (Contact Author)

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

Darmstadt University of Technology

Hochschulstraße 1
S1|02 40
Darmstadt, Hessen D-64289
Germany

Frankfurt University of Applied Sciences ( email )

Nibelungenplatz 1
Frankfurt / Main, 60318
Germany

Fabian Echterling

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

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