Will Machines Revolutionize Investing?

Given that finance is ultimately tied to human emotions, does the body of research support belief that abilities of machine learning to handle large amounts of data, non-linearities and variable interactions will revolutionize investing? In their January 2023 paper entitled “How Can Machine Learning Advance Quantitative Asset Management?”, David Blitz, Tobias Hoogteijling, Harald Lohre and Philip Messow study application of machine learning to investing from the perspective of a prudent practitioner. They define machine learning models as initially guided software programs that subsequently learn by themselves and then make predictions about unseen (out-of-sample) data. They describe benefits and pitfalls of machine learning versus classical (linear regression) econometrics. They discuss critical design choices for applying machine learning models to asset management. They focus on the ability of machine learning to beat the stock market, but also discuss asset risk forecasting, optimal portfolio construction and trading optimization. Based on the body of research and their collective experience in asset management, they conclude that: (more…)