Machine Learning and The Cross-Section of Emerging Market Stock Returns

89 Pages Posted: 29 Nov 2022 Last revised: 6 Dec 2022

See all articles by Matthias X. Hanauer

Matthias X. Hanauer

Technische Universität München (TUM); Robeco Quantitative Investments

Tobias Kalsbach

Technische Universität München (TUM)

Date Written: December 5, 2022

Abstract

This paper compares various machine learning models to predict the cross-section of emerging market stock returns. We document that allowing for non-linearities and interactions leads to economically and statistically superior out-of-sample returns compared to traditional linear models. Although we find that both linear and machine learning models show higher predictability for stocks associated with higher limits to arbitrage, we also show that this effect is less pronounced for non-linear models. Furthermore, significant net returns can be achieved when accounting for transaction costs, short-selling constraints, and limiting our investment universe to big stocks only.

Keywords: Machine Learning, Return Prediction, Cross-Section of Stock Returns, Emerging Markets, Random Forest, Gradient Boosting, Neural Networks

JEL Classification: C14, C52, C58, G11, G12, G14, G15, G17

Suggested Citation

Hanauer, Matthias Xaver and Kalsbach, Tobias, Machine Learning and The Cross-Section of Emerging Market Stock Returns (December 5, 2022). Available at SSRN: https://ssrn.com/abstract=4287550 or http://dx.doi.org/10.2139/ssrn.4287550

Matthias Xaver Hanauer (Contact Author)

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

Tobias Kalsbach

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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