NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Adam Clark-Joseph

University of Illinois at Urbana-Champaign
Champaign, IL

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: University of Illinois at Urbana-Champaign

NBER Working Papers and Publications

October 2017Sparse Signals in the Cross-Section of Returns
with Alexander M. Chinco, Mao Ye: w23933
This paper applies the Least Absolute Shrinkage and Selection Operator (LASSO) to make rolling 1-minute-ahead return forecasts using the entire cross section of lagged returns as candidate predictors. The LASSO increases both out-of-sample fit and forecast-implied Sharpe ratios. And, this out-of-sample success comes from identifying predictors that are unexpected, short-lived, and sparse. Although the LASSO uses a statistical rule rather than economic intuition to identify predictors, the predictors it identifies are nevertheless associated with economically meaningful events: the LASSO tends to identify as predictors stocks with news about fundamentals.

Published: ALEX CHINCO & ADAM D. CLARK-JOSEPH & MAO YE, 2019. "Sparse Signals in the Cross-Section of Returns," The Journal of Finance, vol 74(1), pages 449-492.

 
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