Essays in machine learning in finance
Abstract/Contents
- Abstract
- The bond market is one of the largest financial markets, with $52.9 trillion of debt outstanding for the US market as of 2021. The implied interest rate for borrowing at different horizons is the fundamental object for this market. However, a complete set of interest is not observed and must be estimated from the noisy market data. In two papers, we develop machine learning methods to precisely estimate the term structure of interest rates and to understand and manage interest-rate related risks. In the first paper, we introduce a robust, flexible and easy-to-implement method for estimating the yield curve from Treasury securities. This method is non-parametric and optimally learns basis functions in reproducing Hilbert spaces with an economically motivated smoothness reward. We provide a closed-form solution of our machine learning estimator as a simple kernel ridge regression, which is straightforward and fast to implement. We show in an extensive empirical study on U.S. Treasury securities, that our method strongly dominates all parametric and non-parametric benchmarks, which positions our method as the new standard for yield curve estimation. In the second paper, we develop a sparse factor model for bond returns, that unifies non- parametric term structure estimation with cross-sectional factor modeling. Building on the modeling framework of the first paper, we estimate an optimal set of sparse basis functions, which maps into a cross-sectional conditional factor model. Our estimated factors are investable portfolios of traded assets, that replicate the full term structure and are sufficient to hedge against interest rate changes. In an extensive empirical study on U.S. Treasury securities, we show that the term structure of excess returns is well explained by four factors. We introduce a new measure for the time-varying complexity of bond markets based on the exposure to higher-order factors.
Description
| Type of resource | text |
|---|---|
| Form | electronic resource; remote; computer; online resource |
| Extent | 1 online resource. |
| Place | California |
| Place | [Stanford, California] |
| Publisher | [Stanford University] |
| Copyright date | 2022; ©2022 |
| Publication date | 2022; 2022 |
| Issuance | monographic |
| Language | English |
Creators/Contributors
| Author | Ye, Ye, active 2022 |
|---|---|
| Degree supervisor | Pelger, Markus |
| Thesis advisor | Pelger, Markus |
| Thesis advisor | Filipović, Damir, 1970- |
| Thesis advisor | Giesecke, Kay |
| Degree committee member | Filipović, Damir, 1970- |
| Degree committee member | Giesecke, Kay |
| Associated with | Stanford University, Department of Management Science and Engineering |
Subjects
| Genre | Theses |
|---|---|
| Genre | Text |
Bibliographic information
| Statement of responsibility | Ye Ye. |
|---|---|
| Note | Submitted to the Department of Management Science and Engineering. |
| Thesis | Thesis Ph.D. Stanford University 2022. |
| Location | https://purl.stanford.edu/br442tp9280 |
Access conditions
- Copyright
- © 2022 by Ye Ye
- License
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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