How Global is Predictability? The Power of Financial Transfer Learning

62 Pages Posted: 29 Nov 2023

See all articles by Oliver Hellum

Oliver Hellum

Copenhagen Business School - Department of Finance

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Anders Rønn-Nielsen

Copenhagen Business School - Department of Finance

Date Written: November 1, 2023

Abstract

We show that asset pricing has a strong global component in the sense that a common global model has stronger predictability of stock returns than local models estimated in each country - even when the global model is estimated without the use of local data. While locally estimated models add no value to a global model, asset pricing nevertheless has a small local component. To detect the local component, we develop a refined transfer learning model that gains power and precision by building off the global component, denoted the ``generalized elastic net” (GENet). We estimate that the predictive parameters are 94% global.

Keywords: Predictability, asset pricing, transfer learning, machine learning

JEL Classification: C53, C58, F3, G1, G4

Suggested Citation

Hellum, Oliver and Pedersen, Lasse Heje and Rønn-Nielsen, Anders, How Global is Predictability? The Power of Financial Transfer Learning (November 1, 2023). Available at SSRN: https://ssrn.com/abstract=4620157 or http://dx.doi.org/10.2139/ssrn.4620157

Oliver Hellum

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3, SOL/A4.17
Copenhagen, Frederiksberg 2000

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anders Rønn-Nielsen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3, SOL/A4.17
Copenhagen, Frederiksberg 2000
Denmark

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,014
Abstract Views
2,140
Rank
40,480
PlumX Metrics