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Using Economic and Financial Information for Stock Selection

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  • Ilir Roko

    (University of Geneva)

  • Manfred Gilli

    (University of Geneva and Swiss Finance Institute)

Abstract

A major inconvenience of the traditional approach in portfolio choice, based upon historical information, is its inability to anticipate sudden changes of price tendencies. Introducing information about future behavior of the assets fundamentals may help to make more appropriate choices. However the specification and parameterization of a model linking this exogenous information to the asset prices is not straightforward. Classification trees can be used to construct partitions of assets of forecasted similar behavior. We analyze the performance of this approach and apply it to different sectors of the S&P500.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-21.

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Length: 20 pages
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Handle: RePEc:chf:rpseri:rp0621

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: Portfolio optimization; Decision trees; Factor models;

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References

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  1. Lehmann, Bruce N, 1990. "Fads, Martingales, and Market Efficiency," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 1-28, February.
  2. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  3. Bruce N. Lehmann, 1988. "Fads, Martingales, and Market Efficiency," NBER Working Papers 2533, National Bureau of Economic Research, Inc.
  4. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
  5. Marina Velikova & Hennie Daniels, 2004. "Decision trees for monotone price models," Computational Management Science, Springer, vol. 1(3), pages 231-244, October.
  6. Narasimhan Jegadeesh, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, 04.
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Cited by:
  1. Piotr Arendarski, 2012. "Tactical allocation in falling stocks: Combining momentum and solvency ratio signals," Working Papers 2012-01, Faculty of Economic Sciences, University of Warsaw.
  2. Björn Fastrich & Peter Winker, 2012. "Robust portfolio optimization with a hybrid heuristic algorithm," Computational Management Science, Springer, vol. 9(1), pages 63-88, February.
  3. Peter Winker & Marianna Lyra & Chris Sharpe, 2011. "Least median of squares estimation by optimization heuristics with an application to the CAPM and a multi-factor model," Computational Management Science, Springer, vol. 8(1), pages 103-123, April.

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