The Term Structure of Machine Learning Alpha

40 Pages Posted: 18 Jun 2023 Last revised: 19 Jul 2023

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Matthias X. Hanauer

Technische Universität München (TUM); Robeco Asset Management

Tobias Hoogteijling

Robeco Quantitative Investments

Clint Howard

Robeco Quantitative Investments

Date Written: June 12, 2023

Abstract

Machine learning (ML) models for predicting stock returns are typically trained on one-month forward returns. While these models show impressive full-sample gross alphas, their performance net of transaction costs post 2004 is close to zero. By training on longer prediction horizons and using efficient portfolio construction rules, we demonstrate that ML-based investment strategies can still yield significant positive net returns. Longer-horizon strategies select slower signals and load more on traditional asset pricing factors but still unlock unique alpha. We conclude that design choices are critical for the success of ML models in real-life applications.

Keywords: machine learning, asset pricing, factor investing, alpha, investment strategies, trading costs

JEL Classification: G10, G12, G17

Suggested Citation

Blitz, David and Hanauer, Matthias Xaver and Hoogteijling, Tobias and Howard, Clint, The Term Structure of Machine Learning Alpha (June 12, 2023). Available at SSRN: https://ssrn.com/abstract=4474637 or http://dx.doi.org/10.2139/ssrn.4474637

David Blitz

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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 Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en-int/about-us/matthias-hanauer

Tobias Hoogteijling

Robeco Quantitative Investments ( email )

Rotterdam, 3011 AG
Netherlands
0655685700 (Phone)

Clint Howard (Contact Author)

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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

Paper statistics

Downloads
3,018
Abstract Views
6,438
Rank
8,135
PlumX Metrics