Portfolio formation with preselection using deep learning from long-term financial data

Wang, W., Li, W. ORCID: https://orcid.org/0000-0003-2878-3185, Zhang, N. and Liu, K. (2019) Portfolio formation with preselection using deep learning from long-term financial data. Expert Systems with Applications, 143. 113042. ISSN 0957-4174 doi: 10.1016/j.eswa.2019.113042

Abstract/Summary

Portfolio theory is an important foundation for portfolio management which is a well-studied subject yet not fully conquered territory. This paper proposes a mixed method consisting of long short-term memory networks and mean-variance model for optimal portfolio formation in conjunction with the asset preselection, in which long-term dependences of financial time-series data can be captured. The experiment uses a large volume of sample data from the UK Stock Exchange 100 Index between March 1994 and March 2019. In the first stage, long short-term memory networks are used to forecast the return of assets and select assets with higher potential returns. After comparing the outcomes of the long short-term memory networks against support vector machine, random forest, deep neural networks, and autoregressive integrated moving average model, we discover that long short-term memory networks are appropriate for financial time-series forecasting, to beat the other benchmark models by a very clear margin. In the second stage, based on selected assets with higher returns, the mean-variance model is applied for portfolio optimisation. The validation of this methodology is carried out by comparing the proposed model with the other five baseline strategies, to which the proposed model clearly outperforms others in terms of the cumulative return per year, Sharpe ratio per triennium as well as average return to the risk per month of each triennium. i.e. potential returns and risks.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/86775
Item Type	Article
Refereed	Yes
Divisions	Henley Business School > Digitalisation, Marketing and Entrepreneurship
Publisher	Elsevier
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