Asset Pricing with Attention Guided Deep Learning

57 Pages Posted: 2 Feb 2022 Last revised: 19 Jul 2022

See all articles by Philippe Chatigny

Philippe Chatigny

University of Sherbrooke - Departement of Computer Science; Laplace Insights

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Chengyu Zhang

McGill University - Desautels Faculty of Management

Date Written: November 25, 2021

Abstract

Deep learning methods, which can accommodate wide ranges of various stock characteristics to identify optimal investment portfolio or stochastic discount factor (SDF), have been criticised for extracting their superior performances from difficult to arbitrage stocks, high limits-to-arbitrage market conditions or extreme turnovers. We introduce \attention-guided deep learning, which, in a data driven way, allows identifying the most influential time-varying firm characteristics contributing to SDF. Attention dramatically improves SDF performance and attention to multiple firm characteristics reduces portfolio rebalancing costs. The attention guided SDF outperforms existing models after excluding small and micro-cap stocks, avoids extreme portfolio weights, and unlike other models, exhibits the best performance during market regimes with the highest price efficiency.

Keywords: No-arbitrage, optimal portfolio, conditional asset pricing, deep learning, attention, big data

JEL Classification: G10, G12, G13, G14

Suggested Citation

Chatigny, Philippe and Goyenko, Ruslan and Zhang, Chengyu, Asset Pricing with Attention Guided Deep Learning (November 25, 2021). Available at SSRN: https://ssrn.com/abstract=3971876 or http://dx.doi.org/10.2139/ssrn.3971876

Philippe Chatigny

University of Sherbrooke - Departement of Computer Science ( email )

2500 bd de l'Universite
Sherbrooke, Qu├ębec J1K 2R1
Canada

Laplace Insights ( email )

230 King St. West suite 201,
Sherbrooke, QC J1H 1P
Canada

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Chengyu Zhang

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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