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Machine Learning and the Forecastability of Cross-Sectional Realized Variance: The Role of Realized Moments

Author

Listed:
  • Vasilios Plakandaras

    (Department of Economics, Democritus University of Thrace, Komotini, Greece)

  • Matteo Bonato

    (Department of Economics and Econometrics, University of Johannesburg, Auckland Park, South Africa; IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Oguzhan Cepni

    (Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics, Copenhagen Business School, Denmark)

Abstract

This paper forecasts monthly cross-sectional realized variance (RV) for U.S. equities across 49 industries and all 50 states. We exploit information in both own-market and cross-market (oil) realized moments (semi-variance, leverage, skewness, kurtosis, and upside and downside tail risk) as predictors. To accommodate cross-sectional dependence, we compare standard econometric panel models with machine-learning approaches and introduce a new machine-learning technique tailored specifically to panel data. Using observations from April 1994 through April 2023, the panel-dedicated machine-learning model consistently outperforms all other methods, while oil-related moments add little incremental predictive power beyond own-market moments. Short-horizon forecasts successfully capture immediate shocks, whereas longer-horizon forecasts reflect broader structural economic changes. These results carry important implications for portfolio allocation and risk management.

Suggested Citation

  • Vasilios Plakandaras & Matteo Bonato & Rangan Gupta & Oguzhan Cepni, 2025. "Machine Learning and the Forecastability of Cross-Sectional Realized Variance: The Role of Realized Moments," Working Papers 202518, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202518
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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