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Deep learning searches for nonlinear factors for predicting asset returns. Predictability is achieved via multiple layers of composite factors as opposed to additive ones. Viewed in this way, asset pricing studies can be revisited using…
Portfolio construction traditionally relies on separately estimating expected returns and covariance matrices using historical statistics, often leading to suboptimal allocation under time-varying market conditions. This paper proposes a…
We provide a new theory for nodewise regression when the residuals from a fitted factor model are used. We apply our results to the analysis of the consistency of Sharpe ratio estimators when there are many assets in a portfolio. We allow…
We study the dynamic portfolio selection of an investor who uses deep learning methods to forecast stock market excess returns. In a two-asset allocation problem, deep neural networks -- both feedforward and long short-term memory (LSTM)…
To have a superior generalization, a deep learning neural network often involves a large size of training sample. With increase of hidden layers in order to increase learning ability, neural network has potential degradation in accuracy.…
Modeling and managing portfolio risk is perhaps the most important step to achieve growing and preserving investment performance. Within the modern portfolio construction framework that built on Markowitz's theory, the covariance matrix of…
In dealing with high-dimensional data sets, factor models are often useful for dimension reduction. The estimation of factor models has been actively studied in various fields. In the first part of this paper, we present a new approach to…
This paper presents an augmented deep factor model that generates latent factors for cross-sectional asset pricing. The conventional security sorting on firm characteristics for constructing long-short factor portfolio weights is nonlinear…
We propose to represent a return model and risk model in a unified manner with deep learning, which is a representative model that can express a nonlinear relationship. Although deep learning performs quite well, it has significant…
Deep Learning is a consolidated, state-of-the-art Machine Learning tool to fit a function when provided with large data sets of examples. However, in regression tasks, the straightforward application of Deep Learning models provides a point…
Recent developments in deep learning techniques have motivated intensive research in machine learning-aided stock trading strategies. However, since the financial market has a highly non-stationary nature hindering the application of…
Neural networks have been very successful in many applications; we often, however, lack a theoretical understanding of what the neural networks are actually learning. This problem emerges when trying to generalise to new data sets. The…
The objective function of a matrix factorization model usually aims to minimize the average of a regression error contributed by each element. However, given the existence of stochastic noises, the implicit deviations of sample data from…
Ensuring fairness in machine learning is a critical and challenging task, as biased data representations often lead to unfair predictions. To address this, we propose Deep Fair Learning, a framework that integrates nonlinear sufficient…
We use deep neural networks to estimate an asset pricing model for individual stock returns that takes advantage of the vast amount of conditioning information, while keeping a fully flexible form and accounting for time-variation. The key…
We study deep neural networks and their use in semiparametric inference. We establish novel rates of convergence for deep feedforward neural nets. Our new rates are sufficiently fast (in some cases minimax optimal) to allow us to establish…
We develop a rotation-invariant neural network that provides the global minimum-variance portfolio by jointly learning how to lag-transform historical returns and marginal volatilities and how to regularise the eigenvalues of large equity…
We propose a unified framework for estimating low-rank matrices through nonconvex optimization based on gradient descent algorithm. Our framework is quite general and can be applied to both noisy and noiseless observations. In the general…
Precisely forecasting the excess returns of an asset (e.g., Tesla stock) is beneficial to all investors. However, the unpredictability of market dynamics, influenced by human behaviors, makes this a challenging task. In prior research,…
This paper introduces a neural network-based nonlinear shrinkage estimator of covariance matrices for the purpose of minimum variance portfolio optimization. It is a hybrid approach that integrates statistical estimation with machine…