Equity Premium Prediction with Bagged Machine Learning

AFA 2020

AsianFA 2019, AMES 2019, FMND 2019

56 Pages Posted: 8 Jan 2019 Last revised: 5 Dec 2020

See all articles by Ben Jacobsen

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; Massey University

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Hongwei Zhang

Tilburg University - TIAS School for Business and Society; Central University of Finance and Economics (CUFE)

Date Written: December 5, 2020

Abstract

We introduce a variation of Yu(2011)'s weighted bagging estimation method and show it substantially improves the predictability of the equity premium and other economic variables. This new machine learning method sharply improves equity premium predictability of many models with significant monthly out-of-sample R2 up to almost 3% and annual utility gains of more than 3.5%. The improved predictive performance stems from better performance during periods of economic recession and market turbulence and downturns, as well as increased diversity and built-in shrinkage of our weighted bagging method. Interest rate related variables show the strongest predictive ability for the equity premium.

Keywords: Equity premium, Out-of-sample prediction, Instability, Machine learning, Weighted bagging

JEL Classification: G17, G12, G02, C58

Suggested Citation

Jacobsen, Ben and Jiang, Fuwei and Zhang, Hongwei, Equity Premium Prediction with Bagged Machine Learning (December 5, 2020). AFA 2020, AsianFA 2019, AMES 2019, FMND 2019 , Available at SSRN: https://ssrn.com/abstract=3310289 or http://dx.doi.org/10.2139/ssrn.3310289

Ben Jacobsen

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Massey University ( email )

Auckland
New Zealand

Fuwei Jiang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Hongwei Zhang (Contact Author)

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Central University of Finance and Economics (CUFE)

39 South College Road
Haidian District
Beijing, 100081
China

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