LQG 2024/05/01 – 18:30 – Machine Learning and the Implementable Efficient Frontier – Lasse Pedersen – at Snowflake – IP *OLO* Hybrid

Machine Learning and the Implementable Efficient Frontier

Seminar by Lasse Pedersen

2024/05/01 – In-Person and On-Line – Hybrid!

The LQG is very grateful to Snowflake – for hosting this in-person and on-line hybrid LQG.

In this seminar based on joint work with Theis Jensen, Bryan T. Kelly and Semyon Malamud, Lasse Pedersen will propose that investment strategies should be evaluated based on their net-of-trading-cost return for each level of risk, which they term the “implementable efficient frontier.” While numerous studies use machine learning return forecasts to generate portfolios, their agnosticism toward trading costs leads to excessive reliance on fleeting small-scale characteristics, resulting in poor net returns. In this research the authors develop a framework that produces a superior frontier by integrating trading-cost-aware portfolio optimization with machine learning. The superior net-of-cost performance is achieved by learning directly about portfolio weights using an economic objective. Further, this model gives rise to a new measure of “economic feature importance”.


Lasse Pedersen

Principal at AQR Capital Management, finance professor at Copenhagen Business School and New York University’s Stern School of Business

Lasse Pedersen has served on the board of the American Finance Association, the Economic Advisory Boards of NASDAQ OMX and FTSE, and the Federal Reserve Bank of New York’s Monetary Policy Panel. Lasse was awarded the Bernácer Prize for the best European economist under 40, the Banque de France-TSE Prize in Monetary Economics and Finance, and an Elite Research Prize to outstanding researchers under 45. His research has been published in leading journals and cited by central bank governors. Lasse has served on the editorial boards of several journals, including The Journal of Finance, and as a research associate at the National Bureau of Economic Research and the Centre for Economic Policy Research. He is the author of Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. He earned a B.S. and an M.S. in mathematics-economics from the University of Copenhagen and a Ph.D. in finance from Stanford University.