Tuesday, July 24, 2018

Gu-Kelly-Xiu and Neural Nets in Economics

I'm on record as being largely unimpressed by the contributions of neural nets (NN's) in economics thus far. In many economic environments the relevant non-linearities seem too weak and the signal/noise ratios too low for NN's to contribute much.

The Gu-Kelly-Xiu paper that I mentioned earlier may change that. I mentioned their success in applying machine-learning methods to forecast equity risk premia out of sample. NN's, in particular, really shine. The paper is thoroughly and meticulously done.

This is potentially a really big deal.