Unless you’ve been living on another planet, you would have come across experts musing about the potential of technology to revolutionize finance. To be sure, some of the new technologies are indeed game changers – stuff like e-payments, block-chain and cyber-security. These advances are important, but they are kind of mundane. Investors are more excited about the prospect of software so powerful that they can comb through tons of financial data, pick up interesting patterns and make accurate predictions about future asset returns. If and when that happens, we will surely have arrived at the gilded age of robo-assisted predictions. But this is a big “if”. This blog explains why.
Say you want to predict tomorrow or next month’s stock price using a bunch of variables known as predictors. Examples of predictors for stock returns include economic variables like interest rates, bond yield spreads, inflation expectations, industrial output and GDP