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Return
Deep learning, predictability, and optimal portfolio returns
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PRE
AI
DOI：10.1016/j.jempfin.2026.101705.png)
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Abstract
En 中文
We study the dynamic portfolio selection of an investor who uses deep learning methods to forecast stock market excess returns. In a two-asset allocation problem, deep neural networks - both feedforward and long short-term memory (LSTM) recurrent architectures - deliver economically significant gains in terms of certainty equivalent returns and Sharpe ratios relative to linear predictive regressions. These gains are robust to alternative performance measures, the inclusion of transaction costs, borrowing and short-selling constraints, different rebalancing horizons, and subsample splits, and are particularly pronounced during NBER recessions and periods with large return swings. Within the class of neural networks we consider, economic performance is broadly similar across architectures, with the recurrent LSTM specification providing incremental benefits with more frequent rebalancing. Overall, our evidence suggests that exploiting the time-series structure of standard predictor variables via deep learning can generate meaningful portfolio improvements for investors beyond those obtained from linear models.
Keywords:
Return predictability
Portfolio allocation
Machine learning
Recurrent neural networks
Empirical asset pricing
Journal
J
IF:
2.4
Papers:
43
Citations:
3.9K