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Dissecting Characteristics Nonparametrically

Joachim Freyberger, Andreas Neuhierl and Michael Weber ()

No 6391, CESifo Working Paper Series from CESifo Group Munich

Abstract: We propose a nonparametric method to test which characteristics provide independent information for the cross section of expected returns. We use the adaptive group LASSO to select characteristics and to estimate how they affect expected returns nonparametrically. Our method can handle a large number of characteristics, allows for a exible functional form, and is insensitive to outliers. Many of the previously identified return predictors do not provide incremental information for expected returns, and nonlinearities are important. Our proposed method has higher out-of-sample explanatory power compared to linear panel regressions, and increases Sharpe ratios by 50%.

Keywords: cross section of returns; anomalies; expected returns; model selection (search for similar items in EconPapers)
JEL-codes: C14 C52 C58 G12 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Dissecting Characteristics Nonparametrically (2018) Downloads
Working Paper: Dissecting Characteristics Nonparametrically (2017) Downloads
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