J. Antonio Sidaoui | Searcharxiv

arXiv2026

The Nonstationarity-Complexity Tradeoff in Return Prediction

Does more data improve return prediction? In non-stationary financial markets, longer training windows improve prediction of complex models but incorporate outdated economic regimes, whereas simpler models require less data and are less vulnerable to changes in economic conditions. We formally characterize this nonstationarity-complexity tradeoff, showing that model complexity and training window length must be jointly optimized. We propose an adaptive selection procedure with formal performance guarantees. Over three decades of U.S. equity markets, our method improves out-of-sample $R^2$ on industry portfolios by 14% relative to fixed-window and regime-switching benchmarks, with large gains during recessions.

stat.ML↗

arXiv2026

Data-Driven Dynamic Factor Modeling via Manifold Learning

We introduce a data-driven dynamic factor framework for modeling the joint evolution of high-dimensional covariates and responses without parametric assumptions. Standard factor models applied to covariates alone often lose explanatory power for responses. Our approach uses anisotropic diffusion maps, a manifold learning technique, to learn low-dimensional embeddings that preserve both the intrinsic geometry of the covariates and the predictive relationship with responses. For time series arising from Langevin diffusions in Euclidean space, we show that the associated graph Laplacian converges to the generator of the underlying diffusion. We further establish a bound on the approximation error between the diffusion map coordinates and linear diffusion processes, and we show that ergodic averages in the embedding space converge under standard spectral assumptions. These results justify using Kalman filtering in diffusion-map coordinates for predicting joint covariate-response evolution. We apply this methodology to equity-portfolio stress testing using macroeconomic and financial variables from Federal Reserve supervisory scenarios, achieving mean absolute error improvements of up to 55% over classical scenario analysis and 39% over principal component analysis benchmarks.

stat.ML↗