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On tree-structured linear and quantile regression-based asset pricing

Author

Listed:
  • John Galakis
  • Ioannis Vrontos
  • Panos Xidonas

Abstract

Purpose - This study aims to introduce a tree-structured linear and quantile regression framework to the analysis and modeling of equity returns, within the context of asset pricing. Design/Methodology/Approach - The approach is based on the idea of a binary tree, where every terminal node parameterizes a local regression model for a specific partition of the data. A Bayesian stochastic method is developed including model selection and estimation of the tree structure parameters. The framework is applied on numerous U.S. asset pricing models, using alternative mimicking factor portfolios, frequency of data, market indices, and equity portfolios. Findings - The findings reveal strong evidence that asset returns exhibit asymmetric effects and non- linear patterns to different common factors, but, more importantly, that there are multiple thresholds that create several partitions in the common factor space. Originality/Value - To the best of the authors' knowledge, this paper is the first to explore and apply a tree-structured and quantile regression framework in an asset pricing context.

Suggested Citation

  • John Galakis & Ioannis Vrontos & Panos Xidonas, 2022. "On tree-structured linear and quantile regression-based asset pricing," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 21(3), pages 204-245, May.
    • Handle: RePEc:eme:rafpps:raf-10-2021-0283
    DOI: 10.1108/RAF-10-2021-0283
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    More about this item

    Keywords

    Asset pricing; Bayesian inference; Markov chain Monte Carlo; Non-linear dynamics; Tree-structured (linear and quantile) regression models; C1; C11; G11; G12;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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