Nonparametric model test by using adaptive group LASSO method to identify the effective features in predicting the expected returns of stock portfolios

Subject Areas : Journal of Investment Knowledge

Raheleh ossadat Mortazavi ¹ , Hamidreza Vakilifard ^{2 *} , Ghodratallah Talebnia ³ , seyedeh mahboobeh jafari ⁴

1 - PhD student of financial management Department of Management, Kish International Branch, Islamic Azad University, Kish Island, Iran.
2 - Faculty member of Azad University
3 - A faculty member of Azad University
4 - A faculty member of Azad University

Received: 2019-03-07 Accepted : 2019-07-17 Published : 2022-12-22

Keywords: Effective features, Adaptive group LASSO, Expected Return, Nonparametric method,

Abstract :

In this paper, a new nonparametric method is applied using the adaptive group LASSO for selecting features and studying which of the features provide incremental information for predicting the cross-sectional expected return. Out of many features mentioned in previous studies, the effect of 36 characteristics on the expected returns of stock portfolios in Tehran Stock Exchange (1396-1387) was investigated.The result of this study shows that only three to five features provide incremental information to predict the expected return on stock portfolios. Therefore, only the return characteristics of 2 to 1 month before the forecast, total fluctuations, beta, maximum daily returns, and the ratio of price to the highest price have the power to predict the expected return on stock portfolios. The rest of the studied features do not have the power to predict expected returns.

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