Boosting Agnostic Fundamental Analysis: Using Machine Learning to Identify Mispricing in European Stock Markets

19 Pages Posted: 14 Dec 2021

See all articles by Matthias X. Hanauer

Matthias X. Hanauer

Technische Universität München (TUM); Robeco Quantitative Investments

Marina Kononova

University of Marburg - School of Business & Economics

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Date Written: December 5, 2021

Abstract

Interested in fundamental analysis and inspired by Bartram and Grinblatt (2018 & 2021), we apply linear regression (LR) and tree-based machine learning (ML) methods to estimate monthly peer-implied fair values of European stocks from 21 accounting variables. Comparing LR and ML models, we document substantial heterogeneity in the importance of predictors as measured by SHAP values. Examining trading strategies based on deviations from fair values, we find ML-strategies earn substantially higher risk-adjusted returns (“alpha”) than their LR-counterparts (48–66 vs. 11–36 bp per month for value-weighted portfolios). Our findings document the importance of allowing for non-linearities and interactions in fundamental analysis, as well as substantial non-naïve market inefficiencies.

Keywords: Fundamental analysis, market efficiency, stock return, machine learning, random forest, gradient boo

JEL Classification: C45, C53, G11, G14, G15

Suggested Citation

Hanauer, Matthias Xaver and Kononova, Marina and Rapp, Marc Steffen, Boosting Agnostic Fundamental Analysis: Using Machine Learning to Identify Mispricing in European Stock Markets (December 5, 2021). Available at SSRN: https://ssrn.com/abstract=3977872 or http://dx.doi.org/10.2139/ssrn.3977872

Matthias Xaver Hanauer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.professors.wi.tum.de/fm/team/researcher/dr-matthias-hanauer-cfa/

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en/insights/authors/matthias-hanauer.html

Marina Kononova

University of Marburg - School of Business & Economics ( email )

Universitätsstrasse 24
D-35032 Marburg, D-35032
Germany

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

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