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Six-factor asset pricing and portfolio investment via deep learning: Evidence from Chinese stock market

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  • Yao, Haixiang
  • Xia, Shenghao
  • Liu, Hao

Abstract

This paper proposes a long short-term memory (LSTM) neural network model to predict daily stock price movements based on asset pricing factors (i.e., the five factors proposed by Fama and French, and the short-term momentum factor). Based on three independent experiments, we systematically evaluate the explanatory power and the predictive power of the LSTM model by employing 3316 A-share listed companies in the Shanghai and Shenzhen stock exchanges from the in-sample period January 1, 2008 to December 31, 2019. Furthermore, we propose a four-step approach to dynamically update the underlying stocks in different portfolios based on the empirical findings. All portfolios are simulated using out-of-sample data (i.e., from January 1, 2020, to May 31, 2021) to avoid look-ahead bias. The trading results suggest that our dynamic investment strategies are superior to the benchmark index and are able to generate significant returns with relatively low risks.

Suggested Citation

  • Yao, Haixiang & Xia, Shenghao & Liu, Hao, 2022. "Six-factor asset pricing and portfolio investment via deep learning: Evidence from Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:pacfin:v:76:y:2022:i:c:s0927538x22001810
    DOI: 10.1016/j.pacfin.2022.101886
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    References listed on IDEAS

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    Cited by:

    1. Ni, Xuanming & Zheng, Tiantian & Zhao, Huimin & Zhu, Shushang, 2023. "High-dimensional portfolio optimization based on tree-structured factor model," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Long short-term memory (LSTM); Deep learning; Empirical asset pricing; Six-factor model; Quantitative investment;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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