Growing the Efficient Frontier on Panel Trees

Lin Cong, Guanhao Feng (), Jingyu He and Xin He

No 30805, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a new class of tree-based models (P-Trees) for analyzing (unbalanced) panel data using economically guided, global (instead of local) split criteria that guard against overfitting while preserving sparsity and interpretability. To generalize security sorting and better estimate the efficient frontier, we grow a P-Tree top-down to split the cross section of asset returns to construct test assets and re-cover the stochastic discount factor under the mean-variance efficient framework, visualizing (asymmetric) nonlinear interactions among firm characteristics. When applied to U.S. equities, boosted (multi-factor) P-Trees significantly advance the efficient frontier relative to those constructed with established factors and common test assets. P-Tree test assets are diversified and exhibit significant unexplained alphas against benchmark models. The unified P-Tree factors outperform most known observable and latent factor models in pricing cross-sectional returns, delivering transparent and effective trading strategies. Beyond asset pricing, our framework offers a more interpretable and computationally efficient alternative to recent machine learning and AI models for analyzing panel data through goal-oriented, high-dimensional clustering.

JEL-codes: C1 G11 G12 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ecm and nep-fmk
Note: AP
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.nber.org/papers/w30805.pdf (application/pdf)

Related works:
Working Paper: Growing the Efficient Frontier on Panel Trees (2025)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:30805

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w30805

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().