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Machine Learning Forecasts of Asymmetric Betas Using Firm-Specific Information

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  • Thomas Conlon
  • John Cotter
  • Iason Kynigakis

Abstract

We demonstrate that machine learning methods provide a powerful framework for modelling conditional asymmetric risk. Using a large cross-section of US stocks and a comprehensive set of firm characteristics, we show that allowing for nonlinearities significantly increases the out-of-sample performance across a wide range of asymmetric beta measures and forecasting horizons. Trading frictions, followed by characteristics related to intangibles, momentum and growth, emerge as the most important drivers of future risk dynamics. Reconstructing CAPM beta from forecasts of asymmetric beta components indicates that a more granular decomposition of systematic risk yields a more accurate representation of market beta. We also find that incorporating conditional beta forecasts into discounted cash flow models that account for the term structure of betas enhances equity valuation accuracy. Finally, we show that the statistical outperformance of conditional betas translates into economically significant benefits for market-neutral portfolio investors.

Suggested Citation

  • Thomas Conlon & John Cotter & Iason Kynigakis, 2026. "Machine Learning Forecasts of Asymmetric Betas Using Firm-Specific Information," Papers 2604.22933, arXiv.org.
    • Handle: RePEc:arx:papers:2604.22933
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    References listed on IDEAS

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