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Machine Forecast Disagreement

Author

Listed:
  • Turan G. Bali
  • Bryan T. Kelly
  • Mathis Mörke
  • Jamil Rahman

Abstract

We propose a statistical model of heterogeneous beliefs where investors are represented as different machine learning model specifications. Investors form return forecasts from their individual models using common data inputs. We measure disagreement as forecast dispersion across investor-models (MFD). Our measure aligns with analyst forecast disagreement but more powerfully predicts returns. We document a large and robust association between belief disagreement and future returns. A decile spread portfolio that sells stocks with high disagreement and buys stocks with low disagreement earns a value-weighted return of 14% per year. Further analyses suggest MFD-alpha is mispricing induced by short-sale costs and limits-to-arbitrage.

Suggested Citation

  • Turan G. Bali & Bryan T. Kelly & Mathis Mörke & Jamil Rahman, 2023. "Machine Forecast Disagreement," NBER Working Papers 31583, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31583
    Note: AP
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    More about this item

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G4 - Financial Economics - - Behavioral Finance
    • G40 - Financial Economics - - Behavioral Finance - - - General

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