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Autoregressive Random Forests: Machine Learning and Lag Selection for Financial Research

Author

Listed:
  • Efstathios Polyzos

    (Zayed University)

  • Costas Siriopoulos

    (Zayed University)

Abstract

This paper provides evidence on the use of Random Regression Forests (RRF) for optimal lag selection. Using an extended sample of 144 data series, of various data types with different frequencies and sample sizes, we perform optimal lag selection using RRF and compare the results with seven “traditional” information criteria as well as with three other machine learning approaches. We show that the different information criteria produce differing outcomes in terms of optimal lag selection. To quantify performance, we compare the forecast errors on autoregressive models using the optimal lags selected by the criteria and demonstrate that RRF outperforms other approaches. We provide suggestions to researchers as to which approach to use, under different combinations of data type/data frequency and data type/sample size.

Suggested Citation

  • Efstathios Polyzos & Costas Siriopoulos, 2024. "Autoregressive Random Forests: Machine Learning and Lag Selection for Financial Research," Computational Economics, Springer;Society for Computational Economics, vol. 64(1), pages 225-262, July.
    • Handle: RePEc:kap:compec:v:64:y:2024:i:1:d:10.1007_s10614-023-10429-9
    DOI: 10.1007/s10614-023-10429-9
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    More about this item

    Keywords

    Random regression forest; Optimal lag; Lasso; Ridge regression; Bayesian model averaging;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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