Index tracking through deep latent representation learning

초록

We consider the problem of index tracking whose goal is to construct a portfolio that minimizes the tracking error between the returns of a benchmark index and the tracking portfolio. This problem carries significant importance in financial economics as the tracking portfolio represents a parsimonious index that facilitates a practical means to trade the benchmark index. For this reason, extensive studies from various optimization and machine learning-based approaches have ensued. In this paper, we solve this problem through the latest developments from deep learning. Specifically, we associate a deep latent representation of asset returns, obtained through a stacked autoencoder, with the benchmark index's return to identify the assets for inclusion in the tracking portfolio. Empirical results indicate that to improve the performance of previously proposed deep learning-based index tracking, the deep latent representation needs to be learned in a strictly hierarchical manner and the relationship between the returns of the index and the assets should be quantified by statistical measures. Various deep learning-based strategies have been tested for the stock market indices of the S&P 500, FTSE 100 and HSI, and it is shown that our proposed methodology generates the best index tracking performance.

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