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Is Machine Learning Better in Prediction of Direction or Value?

21.May 2025

Building machine learning models for trading is full of nuances, and one important but often overlooked question is: what exactly should we try to predict—the direction of the next market move or the actual value of the asset’s return? A recent paper by Cheng, Shang, and Zhao, titled “Direction is More Important than Speed” offers a clear and practical answer. Their research shows that focusing on direction—simply whether returns will be positive or negative—leads to better model accuracy and, more importantly, stronger real-world investment performance. This is especially true when using machine learning methods, where predicting the direction allows models to better capture downside risks and build more effective trading strategies. For anyone using ML in finance, this paper makes a strong case that predicting where the market is headed is often more valuable than predicting how far it will go.

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Are Sector-Specific Machine Learning Models Better Than Generalists?

14.May 2025

Can machine learning models better predict stock returns if they are tailored to specific industries, or is a one-size-fits-all (generalist) approach sufficient? This question lies at the heart of a recent research paper by Matthias Hanauer, Amar Soebhag, Marc Stam, and Tobias Hoogteijling. Their findings suggest that the optimal solution lies somewhere in between: a “Hybrid” machine learning model that is aware of industry structures but still trained on the full cross-section of stocks offers the best performance.

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Fear, Not Risk, Explains Asset Pricing

17.April 2025

With financial markets increasingly whipsawed by geopolitical tensions and unpredictable policy shifts from the Trump administration—investors are once again questioning how to understand risk, fear, and the true drivers of returns. A recent and compelling paper dives into this debate with a provocative thesis: in “Fear, Not Risk, Explains Asset Pricing,” authors Rob Arnott and Edward McQuarrie argue that traditional models built on quantifiable risk have failed to explain real-world returns, and that fear—messy, emotional, and deeply human—is the missing piece.

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Navigating Market Turmoil with Quantpedia Tools: A Rational Guide for Portfolio Management

7.April 2025

The recent imposition of sweeping global tariffs by President Donald Trump has triggered a sharp and sudden selloff across global equity markets. In times like these, it’s natural for panic to set in. However, as quantitative investors, our strength lies in data-driven decision-making, risk management, and maintaining discipline when others lose theirs.

Rather than reacting emotionally, the prudent course of action is to reassess the robustness of our portfolios. Are we diversified across uncorrelated strategies? Do we have components in place that act as hedges during market crises? Fortunately, the tools provided by Quantpedia can help investors, traders, and portfolio managers identify, test, and deploy crisis-resilient strategies in a structured and evidence-based manner.

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How Mega Tech Stocks Impact Factor Strategies

26.March 2025

The dominance of mega-tech stocks, particularly the “Magnificent 7,” in both U.S. and global equity indexes has a profound impact on factor portfolios. When constructing value-weighted smart beta strategies, these portfolios often end up heavily concentrated in a few individual stocks. This concentration introduces idiosyncratic risk, skewing the risk profiles of factor strategies. While no active strategy can entirely avoid the influence of these high-market-cap stocks, it is critical to limit their exposure to reduce idiosyncratic risk and improve the stability of factor-based approaches.

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It’s About the Price of Oil, Not ESG

23.January 2025

The growing urgency of climate change has increased scrutiny of companies’ ESG (Environmental, Social, and Governance) practices. Investors are now more inclined to support firms that demonstrate strong ESG commitments, often willing to pay a green premium for sustainable investments. However, is the spread in performance between the ‘Sin’ and ‘Saint’ stocks driven by the ESG factor or some other omitted variable? The recent study by Zhan Shi and Shaojun Zhang suggests that the hidden force that may be in play is the price of the oil.

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