AlphaPortfolio for Investment and Economically Interpretable AI

68 Pages Posted: 20 Apr 2020 Last revised: 15 Jul 2020

See all articles by Lin William Cong

Lin William Cong

Cornell University - Samuel Curtis Johnson Graduate School of Management

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Jingyuan Wang

Beihang University (BUAA)

Yang Zhang

Beihang University (BUAA)

Date Written: May 21, 2020

Abstract

We propose reinforcement-learning-based portfolio management, an alternative to the traditional two-step portfolio-construction paradigm (e.g., Markowitz, 1952), to directly optimize investors' objectives without relying on estimates of distributions of asset returns. Specifically, we extend cutting-edge AI tools such as Transformer to allow multi-asset sequence modeling, so as to effectively capture the high-dimensional, non-linear, noisy, interacting, and dynamic nature of economic data and market environments. The resulting AlphaPortfolio yields stellar out-of-sample performances even after imposing various economic and trading restrictions. Importantly, we use polynomial-feature-sensitivity and textual-factor analyses to project the model onto linear regression and natural language spaces for greater transparency and interpretation. Such ``economic distillations'' reveal key market signals, firms' financials, and disclosure topics, including their rotation and non-linearity, that drive investment performance. Overall, we highlight the utility of reinforcement deep learning and provide a general procedure for interpreting AI and big data analytics in finance and beyond.

Keywords: Artificial Intelligence, Distillation, LSTM, Machine Learning, Portfolio Theory, Reinforcement Learning, Textual Analysis.

Suggested Citation

Cong, Lin and Tang, Ke and Wang, Jingyuan and Zhang, Yang, AlphaPortfolio for Investment and Economically Interpretable AI (May 21, 2020). Available at SSRN: https://ssrn.com/abstract=3554486 or http://dx.doi.org/10.2139/ssrn.3554486

Lin Cong (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.linwilliamcong.com/

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

Jingyuan Wang

Beihang University (BUAA) ( email )

37 Xue Yuan Road
Beijing 100083
China

Yang Zhang

Beihang University (BUAA) ( email )

37 Xue Yuan Road
Beijing 100083
China

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