Pub Date : 2022-01-02DOI: 10.1080/10293523.2022.2045701
Roberto Catanho, A. Saville
ABSTRACT The cyclically adjusted price-earnings ratio (CAPE) is a tool that has become widely used to predict market returns. However, recently, deterioration in its forecast strength has surfaced. At the same time, global long-term interest rates have declined and are expected to remain at record lows, which the CAPE fails to consider. Omitting to fully examine the impact of the cost on capital on the effectiveness of CAPE as a valuation tool represents a gap in knowledge. This study uses a modified CAPE to account for interest rates, known as the excess CAPE yield (ECY), to offer an alternative – and potentially improved – model for predicting global stock market returns. We find that CAPEs peak when real interest rates are between 3% and 5%, while the ECY fails to improve on the predictive abilities of the CAPE.
{"title":"A modified Shiller's cyclically adjusted price-to-earnings (CAPE) ratio for stock market index valuation in a zero-interest rate environment","authors":"Roberto Catanho, A. Saville","doi":"10.1080/10293523.2022.2045701","DOIUrl":"https://doi.org/10.1080/10293523.2022.2045701","url":null,"abstract":"ABSTRACT The cyclically adjusted price-earnings ratio (CAPE) is a tool that has become widely used to predict market returns. However, recently, deterioration in its forecast strength has surfaced. At the same time, global long-term interest rates have declined and are expected to remain at record lows, which the CAPE fails to consider. Omitting to fully examine the impact of the cost on capital on the effectiveness of CAPE as a valuation tool represents a gap in knowledge. This study uses a modified CAPE to account for interest rates, known as the excess CAPE yield (ECY), to offer an alternative – and potentially improved – model for predicting global stock market returns. We find that CAPEs peak when real interest rates are between 3% and 5%, while the ECY fails to improve on the predictive abilities of the CAPE.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"51 1","pages":"49 - 66"},"PeriodicalIF":0.9,"publicationDate":"2022-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46388864","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-01-02DOI: 10.1080/10293523.2022.2034354
Sunitha Kumaran
ABSTRACT The appealing features of cryptocurrency in the digital money sector have put them into the category of investable assets. Investment professionals have begun to consider their investability and diversification benefits. It is vital for investors to understand the return-risk behaviour among investable assets to reap the benefits of diversification. This paper considers a proxy of cryptos, specifically Bitcoin, Litecoin, Ethereum, Ripple & Neo, and the Middle East stock market indices, to examine the dynamic relationship among them using the vector error correction model. This study found evidence to suggest that cryptos exhibit a co-integrated relationship while there is no evidence of significant cointegrated movements occurring between the cryptos and the market indices. The latter finding implies that cryptos are decoupled from the market indices and can serve as a diversification option for investors. The mean-variance approach confirms that cryptocurrencies fit into an optimal portfolio and involve an enhanced return-risk reward for investors.
{"title":"Portfolio diversification with cryptocurrencies – Evidence from Middle Eastern stock markets","authors":"Sunitha Kumaran","doi":"10.1080/10293523.2022.2034354","DOIUrl":"https://doi.org/10.1080/10293523.2022.2034354","url":null,"abstract":"ABSTRACT The appealing features of cryptocurrency in the digital money sector have put them into the category of investable assets. Investment professionals have begun to consider their investability and diversification benefits. It is vital for investors to understand the return-risk behaviour among investable assets to reap the benefits of diversification. This paper considers a proxy of cryptos, specifically Bitcoin, Litecoin, Ethereum, Ripple & Neo, and the Middle East stock market indices, to examine the dynamic relationship among them using the vector error correction model. This study found evidence to suggest that cryptos exhibit a co-integrated relationship while there is no evidence of significant cointegrated movements occurring between the cryptos and the market indices. The latter finding implies that cryptos are decoupled from the market indices and can serve as a diversification option for investors. The mean-variance approach confirms that cryptocurrencies fit into an optimal portfolio and involve an enhanced return-risk reward for investors.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"51 1","pages":"14 - 34"},"PeriodicalIF":0.9,"publicationDate":"2022-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47487305","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-01-02DOI: 10.1080/10293523.2022.2076372
H. Charif, A. Assaf, Ender Demir, Khaled Mokni
ABSTRACT This paper investigates the impact of economic policy uncertainty (EPU) on real estate investment trusts (REITs) ETFs in a quantile-based framework by employing the nonparametric causality test and the quantile autoregressive (QAR) model. Using data covering the returns of eight major United States (US) Real Estate Investment Trusts (REIT) exchange-traded funds (ETFs) over the period spanning 2 January 2012 to 28 February 2019, we find that there is a weak predictive power of EPU in REITs’ returns and volatility. Our findings indicate that EPU has a leading effect on the real estate market returns at the mean level. However, we find no causality running from EPU to real estate markets volatility at all quantiles, indicating a weak influence of uncertainty on the real estate markets. Besides, our results report a significant impact of the EPU on the returns at the lower and upper quantiles. Yet, the impact is not symmetrical since the EPU shows a positive (negative) impact on the returns during the bearish (bullish) market condition. Moreover, the lagged EPU impacts the REITs negatively only during the normal and bullish market conditions, given all the estimated coefficients being negative and significant. Our results entail policy implications for investors, regulators, and asset managers.
{"title":"The effects of economic policy uncertainty on the US REITs ETFs: A quantile analysis","authors":"H. Charif, A. Assaf, Ender Demir, Khaled Mokni","doi":"10.1080/10293523.2022.2076372","DOIUrl":"https://doi.org/10.1080/10293523.2022.2076372","url":null,"abstract":"ABSTRACT This paper investigates the impact of economic policy uncertainty (EPU) on real estate investment trusts (REITs) ETFs in a quantile-based framework by employing the nonparametric causality test and the quantile autoregressive (QAR) model. Using data covering the returns of eight major United States (US) Real Estate Investment Trusts (REIT) exchange-traded funds (ETFs) over the period spanning 2 January 2012 to 28 February 2019, we find that there is a weak predictive power of EPU in REITs’ returns and volatility. Our findings indicate that EPU has a leading effect on the real estate market returns at the mean level. However, we find no causality running from EPU to real estate markets volatility at all quantiles, indicating a weak influence of uncertainty on the real estate markets. Besides, our results report a significant impact of the EPU on the returns at the lower and upper quantiles. Yet, the impact is not symmetrical since the EPU shows a positive (negative) impact on the returns during the bearish (bullish) market condition. Moreover, the lagged EPU impacts the REITs negatively only during the normal and bullish market conditions, given all the estimated coefficients being negative and significant. Our results entail policy implications for investors, regulators, and asset managers.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"51 1","pages":"67 - 82"},"PeriodicalIF":0.9,"publicationDate":"2022-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45930979","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-10-02DOI: 10.1080/10293523.2021.2010387
M. Tang, Feng Wu, Ming-Chin Hung
ABSTRACT The Black–Litterman (BL) model allows investors to apply their subjective views to asset allocation optimisation. In this study, we construct a multi-asset allocation portfolio of iShares exchange traded funds (ETFs) using mean–variance (MV) and BL models. Two investment strategies, namely lump-sum investment and a systematic investment plan (SIP), are also investigated and applied to ETF portfolios. On the basis of a momentum strategy, three subjective views of investors are developed for the BL model. The contributions of this empirical study are threefold. First, under the SIP strategy, BL portfolios outperform the MV portfolio in terms of cumulative values, even when an investment starts with bad market timing (i.e., 2008). Second, the asset allocation weights of BL portfolios are demonstrated to be closely related to investors’ subjective views and significantly different from those of the MV portfolio. Third, the three BL portfolios constructed on the basis of the momentum strategy exhibit similar performance patterns in their cumulative returns during the period from 2008 to mid-2021, indicating that investors’ views are consistently reflected in the BL portfolios and consequently contribute to the similarity of the portfolios’ performance as they share similarities in the application of momentum strategies.
{"title":"Multi-asset allocation of exchange traded funds: Application of Black–Litterman model","authors":"M. Tang, Feng Wu, Ming-Chin Hung","doi":"10.1080/10293523.2021.2010387","DOIUrl":"https://doi.org/10.1080/10293523.2021.2010387","url":null,"abstract":"ABSTRACT The Black–Litterman (BL) model allows investors to apply their subjective views to asset allocation optimisation. In this study, we construct a multi-asset allocation portfolio of iShares exchange traded funds (ETFs) using mean–variance (MV) and BL models. Two investment strategies, namely lump-sum investment and a systematic investment plan (SIP), are also investigated and applied to ETF portfolios. On the basis of a momentum strategy, three subjective views of investors are developed for the BL model. The contributions of this empirical study are threefold. First, under the SIP strategy, BL portfolios outperform the MV portfolio in terms of cumulative values, even when an investment starts with bad market timing (i.e., 2008). Second, the asset allocation weights of BL portfolios are demonstrated to be closely related to investors’ subjective views and significantly different from those of the MV portfolio. Third, the three BL portfolios constructed on the basis of the momentum strategy exhibit similar performance patterns in their cumulative returns during the period from 2008 to mid-2021, indicating that investors’ views are consistently reflected in the BL portfolios and consequently contribute to the similarity of the portfolios’ performance as they share similarities in the application of momentum strategies.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"50 1","pages":"273 - 293"},"PeriodicalIF":0.9,"publicationDate":"2021-10-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47999028","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-10-02DOI: 10.1080/10293523.2021.2010375
J. Fung, Jason M. K. Cheng, F. Y. Eric Lam
ABSTRACT This study provides early evidence on the performance of Hedged Exchange Traded Funds (HETFs), which were introduced around 2006. These securities track and enable retail investors to access two hedge fund strategies: global macro and long/short equity. Using monthly data of HETFs that survived until December 2017, the paper shows that most of the individual HETFs and HETF portfolios have significant tracking error risk; despite the survivorship bias, the sample of HETFs fails to produce positive average returns and underperforms both 1-month T-bill and S&P500. Moreover, their alphas adjusting for multiple risk factors related to hedge fund returns were negative. We further find that adding individual HETFs and HETF portfolios could not improve the Shape ratios of traditional stocks and/or bonds portfolios, suggesting that HETFs themselves have high market and interest rate exposures.
{"title":"Early evidence on the performance of hedged exchange traded funds","authors":"J. Fung, Jason M. K. Cheng, F. Y. Eric Lam","doi":"10.1080/10293523.2021.2010375","DOIUrl":"https://doi.org/10.1080/10293523.2021.2010375","url":null,"abstract":"ABSTRACT This study provides early evidence on the performance of Hedged Exchange Traded Funds (HETFs), which were introduced around 2006. These securities track and enable retail investors to access two hedge fund strategies: global macro and long/short equity. Using monthly data of HETFs that survived until December 2017, the paper shows that most of the individual HETFs and HETF portfolios have significant tracking error risk; despite the survivorship bias, the sample of HETFs fails to produce positive average returns and underperforms both 1-month T-bill and S&P500. Moreover, their alphas adjusting for multiple risk factors related to hedge fund returns were negative. We further find that adding individual HETFs and HETF portfolios could not improve the Shape ratios of traditional stocks and/or bonds portfolios, suggesting that HETFs themselves have high market and interest rate exposures.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"50 1","pages":"242 - 257"},"PeriodicalIF":0.9,"publicationDate":"2021-10-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45406766","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-10-02DOI: 10.1080/10293523.2021.2010373
Han‐Ching Huang, P. Tung
ABSTRACT We undertake a broad-based study of the effect of the equity incentives of Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) on decisions relating to corporate policies and find that the risk-taking incentives of acquirer CEOs have a greater impact on the probability that firms conduct an acquisition than CFOs, extending the argument that higher risk-taking incentives induce CEOs to undertake more investments. Higher risk-decreasing incentives are associated with greater probability of firms conducting repurchases and seasoned equity issues (SEOs). Specifically, compared with CEOs, the risk-taking incentives of CFOs induce greater probability that firms conduct repurchases and SEOs.
{"title":"CFOs versus CEOs: Risk-taking incentives and decisions of corporate policies","authors":"Han‐Ching Huang, P. Tung","doi":"10.1080/10293523.2021.2010373","DOIUrl":"https://doi.org/10.1080/10293523.2021.2010373","url":null,"abstract":"ABSTRACT We undertake a broad-based study of the effect of the equity incentives of Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) on decisions relating to corporate policies and find that the risk-taking incentives of acquirer CEOs have a greater impact on the probability that firms conduct an acquisition than CFOs, extending the argument that higher risk-taking incentives induce CEOs to undertake more investments. Higher risk-decreasing incentives are associated with greater probability of firms conducting repurchases and seasoned equity issues (SEOs). Specifically, compared with CEOs, the risk-taking incentives of CFOs induce greater probability that firms conduct repurchases and SEOs.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"50 1","pages":"209 - 226"},"PeriodicalIF":0.9,"publicationDate":"2021-10-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42422431","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-10-02DOI: 10.1080/10293523.2021.2010376
Heejin Yang
ABSTRACT This study presents an investor sentiment proxy with a greater explanatory power in determining price changes in the Korean futures market and examines the effect of investor sentiment on futures price changes. We also consider how investor-trading behaviour affects the association between investor sentiment and futures prices. Our empirical results demonstrate that the multiple-variable method is appropriate for examining the explanatory power of investor sentiment in the KOSPI200 index futures market. Investor sentiment significantly affects futures price changes, indicating its important role in futures price dynamics. Futures market sentiment has a greater effect on futures price changes during a positive net position state period. Furthermore, we find that foreign institutional investors’ trading behaviour is positively related to changes in futures prices.
{"title":"Investor sentiment and market dynamics: Evidence from index futures markets","authors":"Heejin Yang","doi":"10.1080/10293523.2021.2010376","DOIUrl":"https://doi.org/10.1080/10293523.2021.2010376","url":null,"abstract":"ABSTRACT This study presents an investor sentiment proxy with a greater explanatory power in determining price changes in the Korean futures market and examines the effect of investor sentiment on futures price changes. We also consider how investor-trading behaviour affects the association between investor sentiment and futures prices. Our empirical results demonstrate that the multiple-variable method is appropriate for examining the explanatory power of investor sentiment in the KOSPI200 index futures market. Investor sentiment significantly affects futures price changes, indicating its important role in futures price dynamics. Futures market sentiment has a greater effect on futures price changes during a positive net position state period. Furthermore, we find that foreign institutional investors’ trading behaviour is positively related to changes in futures prices.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"50 1","pages":"258 - 272"},"PeriodicalIF":0.9,"publicationDate":"2021-10-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49285562","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-10-02DOI: 10.1080/10293523.2021.2010374
Udayan Karnatak, Chirag Malik
ABSTRACT A modified CSAD model is utilised in this research to detect herding in the developing market prior to and during the COVID-19 epidemic. From July 2019 through June 2021, we evaluate the outcomes of the NSE's twelve sectoral indices. We find considerable intentional herding before to the outbreak of COVID-19, but anti-herding after the pandemic on Wednesday. Herding is enhanced on Mondays after COVID-19 outbreak but decreases on the other days of the week. This study suggests that the COVID-19 pandemic may have impaired investors’ capacity to discriminate between signals, leading their investments in sectoral indices to be connected at random rather than distinguishing between signals to follow the market leader for larger returns.
{"title":"Wednesdays obtain herd immunity? Examining the effect of the day of the week on the NSE sectoral market during COVID-19","authors":"Udayan Karnatak, Chirag Malik","doi":"10.1080/10293523.2021.2010374","DOIUrl":"https://doi.org/10.1080/10293523.2021.2010374","url":null,"abstract":"ABSTRACT A modified CSAD model is utilised in this research to detect herding in the developing market prior to and during the COVID-19 epidemic. From July 2019 through June 2021, we evaluate the outcomes of the NSE's twelve sectoral indices. We find considerable intentional herding before to the outbreak of COVID-19, but anti-herding after the pandemic on Wednesday. Herding is enhanced on Mondays after COVID-19 outbreak but decreases on the other days of the week. This study suggests that the COVID-19 pandemic may have impaired investors’ capacity to discriminate between signals, leading their investments in sectoral indices to be connected at random rather than distinguishing between signals to follow the market leader for larger returns.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"50 1","pages":"227 - 241"},"PeriodicalIF":0.9,"publicationDate":"2021-10-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48712020","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-07-03DOI: 10.1080/10293523.2021.1876817
Y. J. Kim, J. H. Kim, Sewon Kwon, Su Jeong Lee
ABSTRACT Prior studies in Korea document that low accrual firms yield extremely low returns, driving away abnormal returns of an accrual-based trading strategy. We examine whether the performance of an accrual-based trading strategy can be improved using fundamental analysis to distinguish financially strong firms (‘winners’) from financially weak firms (‘losers’) within low accrual firms. Using Korean data from 1994 to 2018, our findings are summarised as follows. First, applying FSCORE in Piotroski (2000) [Journal of Accounting Research, 38(supplement), 1–41] to distinguish winners from losers within low accrual firms, we find that winners yield much higher future returns than losers. Second, after excluding losers in the low accrual group, the accruals-based hedge portfolio exhibits higher abnormal returns. Lastly, we find that, among low accrual firms, higher FSCORE is associated with less negative accruals, higher future probability, and lower probability of delisting. Overall, our findings imply that the extremely negative accruals (i.e., low accruals) do not signal good fundamentals, although Piotroski (2000) treats the negative sign of accruals as a universally positive signal of future performance. It also implies that investors do not fully incorporate the implications of low accruals for future performance.
{"title":"Fundamental analysis, low accruals, and the accrual anomaly: Korean evidence","authors":"Y. J. Kim, J. H. Kim, Sewon Kwon, Su Jeong Lee","doi":"10.1080/10293523.2021.1876817","DOIUrl":"https://doi.org/10.1080/10293523.2021.1876817","url":null,"abstract":"ABSTRACT Prior studies in Korea document that low accrual firms yield extremely low returns, driving away abnormal returns of an accrual-based trading strategy. We examine whether the performance of an accrual-based trading strategy can be improved using fundamental analysis to distinguish financially strong firms (‘winners’) from financially weak firms (‘losers’) within low accrual firms. Using Korean data from 1994 to 2018, our findings are summarised as follows. First, applying FSCORE in Piotroski (2000) [Journal of Accounting Research, 38(supplement), 1–41] to distinguish winners from losers within low accrual firms, we find that winners yield much higher future returns than losers. Second, after excluding losers in the low accrual group, the accruals-based hedge portfolio exhibits higher abnormal returns. Lastly, we find that, among low accrual firms, higher FSCORE is associated with less negative accruals, higher future probability, and lower probability of delisting. Overall, our findings imply that the extremely negative accruals (i.e., low accruals) do not signal good fundamentals, although Piotroski (2000) treats the negative sign of accruals as a universally positive signal of future performance. It also implies that investors do not fully incorporate the implications of low accruals for future performance.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"50 1","pages":"145 - 160"},"PeriodicalIF":0.9,"publicationDate":"2021-07-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42656342","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-07-03DOI: 10.1080/10293523.2021.1941554
Hyeongjun Kim, Hoon Cho, Doojin Ryu
ABSTRACT This study examines whether corporate default prediction techniques based on machine learning can achieve better performance by using geometrically declining weighted average values of the time series variables, that is, geometric-lag variables. We test four machine learning algorithms: logistic regression, random forest, support vector machine, and feedforward neural network. The geometric-lag financial variables capture each company’s historical financial information. Using such variables reduces the computation time and improves the prediction performance. The actual default rates increase with the predicted default probabilities, suggesting that our model predictions can help investors make better investment decisions.
{"title":"Predicting corporate defaults using machine learning with geometric-lag variables","authors":"Hyeongjun Kim, Hoon Cho, Doojin Ryu","doi":"10.1080/10293523.2021.1941554","DOIUrl":"https://doi.org/10.1080/10293523.2021.1941554","url":null,"abstract":"ABSTRACT This study examines whether corporate default prediction techniques based on machine learning can achieve better performance by using geometrically declining weighted average values of the time series variables, that is, geometric-lag variables. We test four machine learning algorithms: logistic regression, random forest, support vector machine, and feedforward neural network. The geometric-lag financial variables capture each company’s historical financial information. Using such variables reduces the computation time and improves the prediction performance. The actual default rates increase with the predicted default probabilities, suggesting that our model predictions can help investors make better investment decisions.","PeriodicalId":44496,"journal":{"name":"Investment Analysts Journal","volume":"50 1","pages":"161 - 175"},"PeriodicalIF":0.9,"publicationDate":"2021-07-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47185016","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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