Equity Style Timing Using Support Vector Regressions
22 Pages Posted: 13 Jan 2005
Date Written: September 2004
The disappointing performance of value and small cap strategies shows that style consistency may not provide the long-term benefits often assumed in the literature. In this study we examine whether the short-term variation in the U.S. size and value premium is predictable. We document style-timing strategies based on technical and (macro-)economic predictors using a recently developed artificial intelligence tool called Support Vector Regressions (SVR). SVR are known for their ability to tackle the standard problem of overfitting, especially in multivariate settings. Our findings indicate that both premiums are predictable under fair levels of transaction costs and various forecasting horizons.
Keywords: Stock returns, style timing, Support Vector Regression
JEL Classification: C51, C52, C53, G11, G12, G15, G19
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