Year 2020, Volume 12 , Issue 2, Pages 112 - 138 2020-10-23

Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns

Baris Yalin UZUNLU [1] , Syed Muzammil HUSSAİN [2]


This research aims at exploring whether simple trading strategies developed using state-of-the-art Machine Learning (ML) algorithms can guarantee more than the risk-free rate of return or not. For this purpose, the direction of S&P 500 Index returns on every 6th day (SPYRETDIR6) and magnitude of S&P 500 Index daily returns (SPYMAG) were predicted on a broad selection of independent variables using various ML techniques. Using five consecutive data spans of equal length, GBM was found to provide highest prediction accuracy on SPYRETDIR6, consistently. In terms of magnitude prediction of daily returns (SPYMAG), Random Forest results indicated that there is a very high correlation between actual/predicted values of SPY. Based on these results, Trading Strategy #1 (using SPYRETDIR6 predictions) and Trading Strategy #2 (using SPYMAG predictions) were developed and tested against a simple Buy & Hold benchmark of the same index. It was found that Trading Strategy #1 provides negative returns on all data spans, while Trading Strategy #2 has positive returns on average when data is separated into consecutive data spans. None of the trading strategies have a positive Sharpe ratio on average, but Trading Strategy #2 is almost as profitable as investing in T-bills using the risk-free rate.
Machine Learning, S&P 500, Forecasting, Ensemble Methods, XGBoost
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Primary Language en
Subjects Economics
Journal Section Articles
Authors

Author: Baris Yalin UZUNLU (Primary Author)
Institution: Albert-Ludwigs-Universitat Freiburg
Country: Turkey


Author: Syed Muzammil HUSSAİN
Institution: Albert-Ludwigs-Universitat Freiburg
Country: Pakistan


Dates

Publication Date : October 23, 2020

Bibtex @research article { ier805042, journal = {International Econometric Review}, issn = {1308-8793}, eissn = {1308-8815}, address = {Şairler Sokak, No:32/C, Gaziosmanpaşa, Ankara}, publisher = {Econometric Research Association}, year = {2020}, volume = {12}, pages = {112 - 138}, doi = {10.33818/ier.805042}, title = {Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns}, key = {cite}, author = {Uzunlu, Baris Yalin and Hussai̇n, Syed} }
APA Uzunlu, B , Hussai̇n, S . (2020). Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns . International Econometric Review , 12 (2) , 112-138 . DOI: 10.33818/ier.805042
MLA Uzunlu, B , Hussai̇n, S . "Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns" . International Econometric Review 12 (2020 ): 112-138 <https://dergipark.org.tr/en/pub/ier/issue/57382/805042>
Chicago Uzunlu, B , Hussai̇n, S . "Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns". International Econometric Review 12 (2020 ): 112-138
RIS TY - JOUR T1 - Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns AU - Baris Yalin Uzunlu , Syed Hussai̇n Y1 - 2020 PY - 2020 N1 - doi: 10.33818/ier.805042 DO - 10.33818/ier.805042 T2 - International Econometric Review JF - Journal JO - JOR SP - 112 EP - 138 VL - 12 IS - 2 SN - 1308-8793-1308-8815 M3 - doi: 10.33818/ier.805042 UR - https://doi.org/10.33818/ier.805042 Y2 - 2020 ER -
EndNote %0 International Econometric Review Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns %A Baris Yalin Uzunlu , Syed Hussai̇n %T Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns %D 2020 %J International Econometric Review %P 1308-8793-1308-8815 %V 12 %N 2 %R doi: 10.33818/ier.805042 %U 10.33818/ier.805042
ISNAD Uzunlu, Baris Yalin , Hussai̇n, Syed . "Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns". International Econometric Review 12 / 2 (October 2020): 112-138 . https://doi.org/10.33818/ier.805042
AMA Uzunlu B , Hussai̇n S . Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns. IER. 2020; 12(2): 112-138.
Vancouver Uzunlu B , Hussai̇n S . Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns. International Econometric Review. 2020; 12(2): 112-138.
IEEE B. Uzunlu and S. Hussai̇n , "Employing Machine Learning Algorithms to build Trading Strategies with higher than Risk-Free Returns", International Econometric Review, vol. 12, no. 2, pp. 112-138, Oct. 2020, doi:10.33818/ier.805042