Multi-Factor Timing with Deep Learning

73 Pages Posted: 12 Feb 2024 Last revised: 26 Mar 2024

See all articles by Paul Cotturo

Paul Cotturo

Deloitte LLP - Deloitte Canada; University of Waterloo; Gordon S Lang School of Business and Economics, University of Guelph, Guelph, Canada - Department of Economics and Finance

Fred Liu

University of Guelph; University of Western Ontario, Department of Economics

Robert Proner

University of Western Ontario; Gordon S Lang School of Business and Economics, University of Guelph, Guelph, Canada

Date Written: January 18, 2024

Abstract

We develop deep neural networks with economically motivated restrictions that are designed to overcome the main challenges of factor timing. Our critical innovations include integrating multi-task learning to capture the common structure across factors, with long short-term memory neural networks to extract financial and macroeconomic states. This dynamic multi-task neural network significantly outperforms all benchmarks in terms of predictive accuracy and economic gains. We pinpoint tail risk, along with variations on leverage, profitability, and momentum as key predictors, and highlight the importance of capturing their nonlinear interactions. Improved factor timing through neural networks with economic restrictions facilitates more reliable investigation into the economic mechanisms driving factor risk premia, and underscores the value of deep learning for factor investing.

Keywords: Factor Timing, Deep Learning, Economic Structure, Machine Learning, Multi-task Neural Networks, Big Data

JEL Classification: G10, G11, G12, G17, C14, C22, C45, C58

Suggested Citation

Cotturo, Paul and Liu, Fred and Proner, Robert, Multi-Factor Timing with Deep Learning (January 18, 2024). Available at SSRN: https://ssrn.com/abstract=4698640 or http://dx.doi.org/10.2139/ssrn.4698640

Paul Cotturo

Deloitte LLP - Deloitte Canada ( email )

8 Adelaide St West #200
Toronto, Ontario M5H 0A9
Canada
4166871534 (Phone)

University of Waterloo ( email )

Gordon S Lang School of Business and Economics, University of Guelph, Guelph, Canada - Department of Economics and Finance ( email )

Canada

Fred Liu (Contact Author)

University of Guelph ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

University of Western Ontario, Department of Economics ( email )

London, Ontario
Canada

Robert Proner

University of Western Ontario ( email )

Social Science Centre, Room 4071
London, Ontario N6A 5C2
Canada

Gordon S Lang School of Business and Economics, University of Guelph, Guelph, Canada ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
987
Abstract Views
1,972
Rank
44,050
PlumX Metrics