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1 results

  • Estimating Stock Market Betas via Machine Learning

  • Wolfgang Drobetz, Fabian Hollstein, Tizian Otto, Marcel Prokopczuk
  • Journal:
    Journal of Financial and Quantitative Analysis / Volume 60 / Issue 3 / May 2025
    Published online by Cambridge University Press:
    08 February 2024, pp. 1074-1110
    Print publication:
    May 2025
    • Article
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  • Machine learning-based stock market beta estimators outperform established benchmark models both statistically and economically. Analyzing the predictability of time-varying market betas of U.S. stocks, we document that machine learning-based estimators produce the lowest forecast and hedging errors. They also help to create better market-neutral anomaly strategies and minimum variance portfolios. Among the various techniques, random forests perform the best overall. Model complexity is highly time-varying. Historical stock market betas, turnover, and size are the most important predictors. Compared to linear regressions, allowing for nonlinearity and interactions significantly improves predictive performance.