An empirical study on the application of the Evidential Reasoning rule to decision making in financial investment

摘要

Decision making in financial investment often involves conflicting information and subjective judgment of the investors. The Evidential Reasoning (ER) rule is a probabilistic inference rule that is suitable for handling conflicts in information and allows judgmental weighting on evidence sources. A model of analyst opinions is constructed based on the ER rule, which takes as input stock reports by financial analysts and produces portfolio strategies via evidence combination. Backtesting the investment strategies on data from the China Stock Market & Accounting Research (CSMAR) Database of 120,023 recommendation reports released between November 2008 and December 2012 by 3,761 financial analysts shows that the risk-adjusted average annual return of the strategy outperformed that of the CSI300 index by as much as 10.69% for an investment horizon of six months, with the p value from Student’s t-test as low as 0.02%. The model serves as the first successful application of the ER rule to aggregating financial analysts’ opinions for decision making in stock investment.