Enhancing Time Series Momentum Strategies Using Deep Neural Networks
The Journal of Financial Data Science, Fall 2019
21 Pages Posted: 8 May 2019 Last revised: 10 Jan 2020
Date Written: April 9, 2019
While time series momentum is a well-studied phenomenon in finance, common strategies require the explicit definition of both a trend estimator and a position sizing rule. In this paper, we introduce Deep Momentum Networks -- a hybrid approach which injects deep learning based trading rules into the volatility scaling framework of time series momentum. The model also simultaneously learns both trend estimation and position sizing in a data-driven manner, with networks directly trained by optimising the Sharpe ratio of the signal. Backtesting on a portfolio of 88 continuous futures contracts, we demonstrate that the Sharpe-optimised LSTM improved traditional methods by more than two times in the absence of transactions costs, and continue outperforming when considering transaction costs up to 2-3 basis points. To account for more illiquid assets, we also propose a turnover regularisation term which trains the network to factor in costs at run-time.
Keywords: Momentum Strategies, Trend Following, Machine Learning, Deep Neural Networks, Time Series Prediction
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