Forecasting Multinomial Stock Returns Using Machine Learning Methods

33 Pages Posted: 10 Jul 2020

Date Written: June 18, 2020

Abstract

In this paper, the daily returns of the S&P 500 stock market index are predicted using a variety of different machine learning methods. We propose a new multinomial classification approach to forecasting stock returns. The multinomial approach can isolate the noisy fluctuation around zero return and allows us to focus on predicting the more informative large absolute returns. Our in-sample and out-of-sample forecasting results indicate significant return predictability from a statistical point of view. Moreover, all the machine learning methods considered outperform the benchmark buy-and-hold strategy in a real-life trading simulation. The gradient boosting machine is the top-performer in terms of both the statistical and economic evaluation criteria.

Keywords: S&P 500, market timing, machine learning, gradient boosting

JEL Classification: C22, G12, G17

Suggested Citation

Nevasalmi, Lauri, Forecasting Multinomial Stock Returns Using Machine Learning Methods (June 18, 2020). Available at SSRN: https://ssrn.com/abstract=3630222 or http://dx.doi.org/10.2139/ssrn.3630222

Lauri Nevasalmi (Contact Author)

University of Turku ( email )

20014 Turku
Finland

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