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Machine learning applied to accounting variables yields the risk-return metrics of private company portfolios*

Elias Cavalcante-Filho () and Rodrigo De Losso Flavio Abdenur
Authors registered in the RePEc Author Service: Rodrigo De-Losso

No 2018_23, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: Constructing optimal Markowitz Mean-Variance portfolios of publicly-traded stock is a straighforward and well-known task. Doing the same for portfolios of privately-owned firms, given the lack of historical price data, is a challenge. We apply machine learning models to historical accounting variable data to estimate risk-return metrics – specifically, expected excess returns, price volatility and (pairwise) price correlation – of private companies, which should allow the construction of Mean-Variance optimized portfolios consisting of private companies. We attain out-of-sample 𠑅2 s around 45%, while linear regressions yield 𠑅2 s of only about 10%. This short paper is the result of a real-world consulting project on behalf of Votorantim S.A (“VSA†), a multinational holding company. To the authors’ best knowledge this is a novel application of machine learning in the finance literature.

Keywords: assent pricing; Machine Learning; Portfolio Theory (search for similar items in EconPapers)
JEL-codes: G12 G17 (search for similar items in EconPapers)
Date: 2018-12-20
New Economics Papers: this item is included in nep-big, nep-cmp and nep-rmg
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