{"title":"Deep learning for enhanced index tracking","authors":"Zhiwen Dai, Lingfei Li","doi":"10.1080/14697688.2024.2356239","DOIUrl":null,"url":null,"abstract":"We develop a novel deep learning method for the enhanced index tracking problem, which aims to outperform an index while effectively controlling the tracking error. We generate a dynamic trading policy from a neural network that accepts a set of features as inputs. We design four blocks in the neural network architecture to handle different types of features, including regimes of the index and stocks, their short-term characteristics, and the current allocation. Outputs from the blocks are integrated into the final output that changes the portfolio allocation. We test our model on several indexes in empirical studies based on real market data. Out-of-sample results reveal the importance of different features and demonstrate the ability of our method in obtaining excess returns while effectively controlling the tracking error, downside risk, and transaction costs.","PeriodicalId":20747,"journal":{"name":"Quantitative Finance","volume":null,"pages":null},"PeriodicalIF":1.5000,"publicationDate":"2024-06-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Quantitative Finance","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.1080/14697688.2024.2356239","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
We develop a novel deep learning method for the enhanced index tracking problem, which aims to outperform an index while effectively controlling the tracking error. We generate a dynamic trading policy from a neural network that accepts a set of features as inputs. We design four blocks in the neural network architecture to handle different types of features, including regimes of the index and stocks, their short-term characteristics, and the current allocation. Outputs from the blocks are integrated into the final output that changes the portfolio allocation. We test our model on several indexes in empirical studies based on real market data. Out-of-sample results reveal the importance of different features and demonstrate the ability of our method in obtaining excess returns while effectively controlling the tracking error, downside risk, and transaction costs.
期刊介绍:
The frontiers of finance are shifting rapidly, driven in part by the increasing use of quantitative methods in the field. Quantitative Finance welcomes original research articles that reflect the dynamism of this area. The journal provides an interdisciplinary forum for presenting both theoretical and empirical approaches and offers rapid publication of original new work with high standards of quality. The readership is broad, embracing researchers and practitioners across a range of specialisms and within a variety of organizations. All articles should aim to be of interest to this broad readership.