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Which ML model is best for stock prediction?

Which ML model is best for stock prediction?

Artificial Intelligence & Machine Learning

How do you convince a discretionary Portfolio Manager to use Machine Learning as part of their investment  decision making process? 

My thinking process behind creating the presentation deck. 

1. I will not convince the Portfolio Manager that Quantamental Investing is better than Discretionary Investing, rather I will first understand their perception about Quantamental Investing and then develop the content accordingly 

2. Moreover, the approach that I will take to shift their perspective is to first get into the shoes of the Portfolio Managers to understand their viewpoint on Quantamental Investing. I will then bridge the gap so that they can reach the place that I am at. 

3. I firstly understood the “Why” behind why the Portfolio Managers aren’t using Quantamental Investing – a. They don’t know about it!

b. They know about it but haven’t got the chance to explore it.

c. They want to explore it but don’t know how to adopt it.

d. In addition, they don’t trust the quantamental process. 

4. I then curated the content of the slides keeping in mind what it would take to influence the decision of these 4 categories of Portfolio Managers and tailored the content to cater to their needs.

5. I will finally describe a unique investment idea using machine learning 

Fundamentals of Quantamental Investing in addition, the use of machine learning & mathematical modeling!

What is it? 

Present State & Practical Uses 

Furthermore, modeling, and data analysis to calculate the optimal probability of executing a profitable trade. 

Quantamental funds run around 35% of the $31 trillion of equity assets.  

Human managers, such as traditional hedge funds and other mutual funds, manage just 24%.  

Using machine learning, advanced mathematical modeling, factor investing and the use of alternative data, to make trading and portfolio allocation decisions. 

Performance of Quantamental Investment 

Broad market factors such as value, growth, quality, and momentum have contributed to 65% of global equity manager’s excess returns.

“Three years ago, quant funds became the largest source of institutional trading volume in the American stock market. They account for 36% of institutional volume so far this year, up from just 18% in 2010, according to the Tabb Group.” 

The Quantamental Investing Process

Data Sources 

Gather different types of data streams to identify hidden signals. 

Convert them into factors with economical meaning. 

Model & Factors 

Combine the factors into composite signals through analytic tools. In addition, analyze the efficacy of factors explaining the movement of stock prices to check if they have persistent value over time 

Alpha Generation 

Forecast the portfolio  measures using the  models. Compute the  forward returns for out  of sample data 

Analyzed these portfolios alongside  more traditional factor-based portfolios. 

Portfolio Execution 

Transform predictions and signals into portfolios decisions  using quantitative methods. 

Build optimized portfolio from these various models giving different signals. 

Post Trade Analysis 

Measure the performance of the portfolio after simulating trades, using established metrics to provide feedback to model  building.

Benefits of Quantamental Investing : Improved accuracy and efficiency of trade executions. 

Can consider liquidity,  integrate risk-assessments  and impact of large trades  on the market. 

Exploiting alternate forms of  data to produce better  alpha. 

ML tools can compile geolocation data, satellite imagery, and macroeconomic data. 

Eliminates human-errors  such confirmation bias,  emotions, loss-aversion. 

Furthermore, ML can be used for security selection, portfolio construction and trading  executions. 

ML creates adaptive portfolios. 

ML inputs decide how to  weight allocations within an  index to favor certain  characteristics like low  volatility.

Limitations of Quantamental Investing 

Black Box: Skilled personnel & Data  

Scientists are required to develop and explain complex models to investors. Lack of understanding behind the signals, judgements and strategy makes the investors uncomfortable.

Investors do not adapt well to higher sigma moves or black swan events, if they have no historical data of such events.

Overfitting: Wrong model selection and training methods can give  poor results in the market. Not eliminating the noise can give data-mining bias 

Data Sources: Obtaining quality, relevant and reliable data is crucial in training & testing the model. Using old data leads to incorrect model predictions.

Need for Alternate Investing Techniques 

The Present state 

Only a handful of financial institutions have incorporated a quantitative approach to investing. 

Future Scope 

AI and Big Data, when used in conjunction,  will improve the efficiency of quantitative  models by accurately accounting for  alternate data

The Problem 

Bottom-up analysis overlooks  macro-trends and is influenced  by human emotions. Traditional  

methods overlook new sources of  data. 

The Solution – Develop a quantitative approach to investing 

Identify new alternate data sources (like credit cards, receipts, GPS data,  textual data) to produce robust ML models 

  • The Unique Idea – Sentimental Analysis of  Management Discussions & Analysis 
  • The Intuition – Analyze the company’s performance through the eyes of management to make better investment decisions 
  • The Approach – Ordinal classification of sentiments behind non-financial data through automatic document classification 
  • The Models – The model consists of three integrated submodules (using NLP) to identify historical trends and patterns to enhance investment making 

1. Data Acquisition Model, which will gather MD&A data & clean it to produce machine comprehensive inputs 2. Score-Based Intent Analyzing Model, which will identify inputs and assign a score, based on a predefined intent gauging spectrum. Can incorporate contextual semantic search, to smartly segregate meaning behind the message without programming 

3. Trade Analysis Model, which will group the data into major baskets for decision making. Baskets which cross a score threshold will raise flags, requiring attention for human intelligence and nuance. 

Investment Strategy – We incorporate the quantitative signals of the models to make better estimates of a company’s future. We identify undervalued equity stocks through our ML Models and seek higher return 

Considering micro-events (news articles, management tweets, investor letters) and macro-events (federal announcements, financial laws, political uncertainty) the accuracy of the ML model can increase.

Written by Varun Chandra Gupta

Displaying Varun.jpeg
https://www.linkedin.com/in/varuncgupta/

References 

1. https://www.economist.com/briefing/2019/10/05/the-stockmarket-is now-run-by-computers-algorithms-and-passive-managers 

2. https://www.lehnerinvestments.com/en/quantitative-investing introduction/ 

https://ieeexplore.ieee.org/document/9401964

4. https://www.blackrock.com/corporate/literature/whitepaper/viewpoint artificial-intelligence-machine-learning-asset-management-october 2019.pdf 

5. https://www.morganstanley.com/im/publication/insights/investment insights/ii_quantamentalinvesting_us.pdf 

https://ieeexplore.ieee.org/document/9612552

7. https://www.revuze.it/blog/sentiment-analysis/ 

8. https://www.wallstreetmojo.com/quantamental/#:~:text=Quantamental%2 0 is%20an%20investment%20 strategy,the%20performance%20

9. https://dart.deloitte.com/USDART/home/accounting/sec/financial reporting-manual/topic-9-management-s-discussion-analysis 

https://ieeexplore.ieee.org/document/8780312

11. https://bogartwealth.com/top-down-vs-bottom-up 

12. https://www.bloomberg.com/professional/blog/guide-many-flavors quant-investing/ 

13. https://analyzingalpha.com/quantamental 

14. https://alternativedata.org/data-providers/category,social-sentiment/ 

15. https://corporatefinanceinstitute.com/resources/valuation/mda management-discussion-analysis/

Which ML model is best for stock prediction?