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Return Forecasting by Quantile Regression

Return Forecasting by Quantile Regression. QWAFAFEW December 20101 Larry Pohlman and Lingjie Ma. Outline. The Math Examples Multivariate Model Results. The Math and Code. Model OLS Estimation QR Estimation R, S+, Stat, SAS. What does QR do?. Sample Quantile:. Conditional Quantile:.

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Return Forecasting by Quantile Regression

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  1. Return Forecasting by Quantile Regression QWAFAFEW December 20101 Larry Pohlman and Lingjie Ma

  2. Outline • The Math • Examples • Multivariate Model • Results

  3. The Math and Code • Model • OLS Estimation • QR Estimation • R, S+, Stat, SAS

  4. What does QR do? • Sample Quantile: • Conditional Quantile:

  5. Example: Book to Price

  6. Why QR? A natural question is under what conditions will QR be “better” than OLS? 1. Full picture view: heterogeneity • If there is heterogeneity, then QR will provide a more complete view of the relationship between variables through the effects of independent variables across quantiles of the response distribution. 2. Robustness: fat-tail distribution • If the conditional return distribution is not Gaussian but fat-tailed, the QR estimates will be more robust and efficient than the conditional mean estimates

  7. Example Price Momentum

  8. Example Return on Equity

  9. Multivariate Model • Book to Price • Earnings to Price • Cashflow to Enterprise Value • Balance sheet Accruals • Return on Equity • Price Momentum (9 months) • Earnings Momentum (9 months)

  10. Model Variable Plots

  11. Results: Equal Weight Quintiles

  12. Results: Cap Weighted Qunitiles

  13. Optimized Portfolios TE=3%

  14. Optimized Portfolios TE=6%

  15. Conclusion ￭Conditional mean method is still attractive ￭QR provides a full-picture distributional view ￭Link between distribution estimates and point portfolio.

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