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Deep Learning to Predict Asset Returns (arxiv.org)
1 point by dxbydt on Apr 26, 2018 | hide | past | pdf | discuss on HN

In plain words: Instead of adding up simple risk factors, a deep network stacks layers of combined factors to find patterns that predict stock returns. Tested on a classic set of market predictors, it found nonlinear patterns that explain returns, especially at the extremes of those predictors.

Abstract · Deep Learning for Predicting Asset Returns

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 multi-layer deep learners, such as rectified linear units (ReLU) or long-short-term-memory (LSTM) for time-series effects. State-of-the-art algorithms including stochastic gradient descent (SGD), TensorFlow and dropout design provide imple- mentation and efficient factor exploration. To illustrate our methodology, we revisit the equity market risk premium dataset of Welch and Goyal (2008). We find the existence of nonlinear factors which explain predictability of returns, in particular at the extremes of the characteristic space. Finally, we conclude with directions for future research.

Guanhao Feng, Jingyu He, Nicholas G. Polson
arXiv:1804.09314 · stat.ML, cs.LG, econ.EM · submitted Apr 25, 2018 · updated Apr 26, 2018
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