Forest through the Trees: Building Cross-Sections of Stock Returns

• 成果类型: Article
• 署名作者: Bryzgalova, Svetlana; Pelger, Markus; Zhu, Jason
• 署名单位: University of London; London Business School; Stanford University
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/jofi.13477
• 发表日期: 2025
• 页码: 2447-2506
• 关键词: market value

摘要

We build cross-sections of asset returns for a given set of characteristics, that is, managed portfolios serving as test assets, as well as building blocks for tradable risk factors. We use decision trees to endogenously group similar stocks together by selecting optimal portfolio splits to span the stochastic discount factor, projected on individual stocks. Our portfolios are interpretable and well diversified, reflecting many characteristics and their interactions. Compared to combinations of dozens (even hundreds) of single/double sorts, as well as machine-learning prediction-based portfolios, our cross-sections are low-dimensional yet have up to three times higher out-of-sample Sharpe ratios and alphas.