Recursive portfolio selection with decision trees

Arbeitspapier

A great proportion of stock dynamics can be explained using publicly available information. The relationship between dynamics and public information may be of nonlinear character. In this paper we offer an approach to stock picking by employing so-called decision trees and applying them to XETRA DAX stocks. Using a set of fundamental and technical variables, stocks are classified into three groups according to the proposed position: long, short or neutral. More precisely, by assessing the current state of a company, which is represented by fundamental variables and current market situation, well reflected by technical variables, it is possible to suggest if the current market value of a company is underestimated, overestimated or the stock is fairly priced. The performance of the model over the observed period suggests that XETRA DAX stock returns can adequately be predicted by publicly available economic data. Another conclusion of this study is that the implied volatility variable, when included into the training sample, boosts the predictive power of the model significantly.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2008,009

Classification and Topics

• Classification: Wirtschaft ; Semiparametric and Nonparametric Methods: General ; Econometric and Statistical Methods: Special Topics: Other ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: CART ; decision trees in finance ; nonlinear decision rules ; asset management portfolio optimisation ; Anlageverhalten ; Informationsverhalten ; Portfolio-Management ; Bayes-Statistik ; Theorie ; Kapitalertrag ; Börsenkurs ; Deutschland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Andriyashin, Anton ; Härdle, Wolfgang Karl ; Timofeev, Roman
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/25251