Intraday Market Predictability: A Machine Learning Approach

56 Pages Posted: 13 Jan 2021 Last revised: 10 Mar 2021

See all articles by Dillon Huddleston

Dillon Huddleston

University of Western Ontario - Department of Economics

Fred Liu

University of Western Ontario, Department of Economics

Lars Stentoft

Department of Economics, University of Western Ontario; Center for Interuniversity Research and Analysis on Organization (CIRANO); Aarhus University - CREATES

Date Written: November 8, 2020

Abstract

Conducting, to our knowledge, the largest study ever of five-minute equity market returns using state-of-the-art machine learning models trained on the cross-section of lagged market index constituent returns, we show that regularized linear models and nonlinear tree-based models yield significant market return predictability. Ensemble models perform the best across time and their predictability translates into economically significant Sharpe ratios of 0.98 after transaction costs. These results provide strong evidence that intraday market returns are predictable during short time horizons, beyond what can be explained by transaction costs. Furthermore, we show that constituent returns hold significant predictive information that is not contained in market returns or in price trend and liquidity characteristics. Consistent with the hypothesis that predictability is driven by slow-moving trader capital, predictability decreased post-decimalization, and market returns are more predictable during the middle of the day, on days with high volatility or illiquidity, and in financial crisis periods.

Keywords: Machine Learning, Return Prediction, High-Frequency, Equity Market, Big Data, Lasso, Elastic Net, Random Forest, Gradient Boosting, Deep Neural Networks, Fintech

JEL Classification: G14, G17, C45, C55

Suggested Citation

Huddleston, Dillon and Liu, Fred and Stentoft, Lars, Intraday Market Predictability: A Machine Learning Approach (November 8, 2020). Available at SSRN: https://ssrn.com/abstract=3726765 or http://dx.doi.org/10.2139/ssrn.3726765

Dillon Huddleston

University of Western Ontario - Department of Economics ( email )

Social Science Centre, Room 4071
London, Ontario N6A 5C2
Canada

Fred Liu

University of Western Ontario, Department of Economics ( email )

London, Ontario
Canada

Lars Stentoft (Contact Author)

Department of Economics, University of Western Ontario ( email )

London, Ontario N6A 5B8
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
283
Abstract Views
929
rank
135,005
PlumX Metrics