Asset Allocation via Machine Learning and Applications to Equity Portfolio Management

23 Pages Posted: 27 Jan 2021

See all articles by Qing Yang

Qing Yang

Fudan University - School of Economics

Zhenning Hong

affiliation not provided to SSRN

Ruyan Tian

Fudan University - School of Economics

Tingting Ye

Boston University - Questrom School of Business

Liangliang Zhang

Dongxing Securities

Date Written: November 21, 2020

Abstract

In this paper, we document a novel machine learning based bottom-up approach for static and dynamic portfolio optimization on, potentially, a large number of assets. The methodology overcomes many major difficulties arising in current optimization schemes. For example, we no longer need to compute the covariance matrix and its inverse for mean-variance optimization, therefore the method is immune from the estimation error on this quantity. Moreover, no explicit calls of optimization routine are needed.

Applications to a bottom-up mean-variance-skewness-kurtosis or CRRA (Constant Relative Risk Aversion) optimization with short-sale portfolio constraints in both simulation and real market (China A-shares and U.S. equity markets) environments are studied and shown to perform very well.

Keywords: Portfolio Optimization, Machine Learning, Hierarchical Clustering, K-Means Clustering, Deep Learning Regression, Mean-Variance-Skewness-Kurtosis, Reinforcement Learning, Monte-Carlo Simulation, Bottom-up Approaches

JEL Classification: C61, C63

Suggested Citation

Yang, Qing and Hong, Zhenning and Tian, Ruyan and Ye, Tingting and Zhang, Liangliang, Asset Allocation via Machine Learning and Applications to Equity Portfolio Management (November 21, 2020). Available at SSRN: https://ssrn.com/abstract=3722621 or http://dx.doi.org/10.2139/ssrn.3722621

Qing Yang

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Zhenning Hong

affiliation not provided to SSRN

Ruyan Tian

Fudan University - School of Economics

600 GuoQuan Road
Shanghai, 200433
China

Tingting Ye

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Liangliang Zhang (Contact Author)

Dongxing Securities ( email )

Yangshupu Rd. No. 248
Hongkou District
Shanghai, Shanghai 200433
China

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