A study to mine associations between periodical returns and business financial metrics

Abstract

Over the last five decades, business academics have identified over three hundred return determinants that potentially influence stock returns. However, we still do not know if all return-determinants are equally important, or whether a smaller set of return-determinants has a disproportionately larger influence on stock returns. To answer that, a study needs to include all return-determinants of interest in the same study. However, asset pricing research so far has heavily relied on linear regression to study the relationship between stock returns and return determinants. And one of the main constraints with linear regression as a method is its inability to include more than a few potential return-determinants in a single asset pricing study. This constraint is one of the reasons why asset pricing research so far has not been able to answer whether all three hundred plus return-determinants have equal influence on equity returns or whether there is a smaller set that wields a disproportionately higher influence on stock returns. Asset pricing research needs to look beyond linear regression and seek research methods that does not limit a researcher to determine the relative influence of return-determinants on stock returns. newlineIn recent times, association mining has been successfully applied to gain powerful insights in multidimensional phenomenon like understanding consumer behavior in a retail store or accurate and early diagnosis of a serious illness. The research problem on hand about the relative influence of return-determinants on stock returns is also multi-dimensional in nature. Hence, the research carried out here applies the technique of association rule mining . This method allows placing all potential return-determinants along with equity returns in a single frame to mine association rules between return-determinants and index beating returns. This approach uncovers strong association rules between a small set of return determinants and index beating stock returns. This small set of key return-det