Growing the efficient frontier on panel trees
本摘要源自该文的 NBER 工作论文版（2022），正式发表版可能有调整。
We develop a new class of tree-based models (P-Trees) for analyzing (unbalanced) panel data using economically guided, global (instead of local) split criteria that guard against overfitting while preserving sparsity and interpretability.To generalize security sorting and better estimate the efficient frontier, we grow a P-Tree top-down to split the cross section of asset returns to construct test assets and re-cover the stochastic discount factor under the mean-variance efficient framework, visualizing (asymmetric) nonlinear interactions among firm characteristics.When applied to U.S. equities, boosted (multi-factor) P-Trees significantly advance the efficient frontier relative to those constructed with established factors and common test assets.P-Tree test assets are diversified and exhibit significant unexplained alphas against benchmark models.The unified P-Tree factors outperform most known observable and latent factor models in pricing crosssectional returns, delivering transparent and effective trading strategies.Beyond asset pricing, our framework offers a more interpretable and computationally efficient alternative to recent machine learning and AI models for analyzing panel data through goal-oriented, high-dimensional clustering.