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AlphaForge: A Framework to Mine and Dynamically Combine Formulaic Alpha Factors

Author

Listed:
  • Hao Shi
  • Weili Song
  • Xinting Zhang
  • Jiahe Shi
  • Cuicui Luo
  • Xiang Ao
  • Hamid Arian
  • Luis Seco

Abstract

The complexity of financial data, characterized by its variability and low signal-to-noise ratio, necessitates advanced methods in quantitative investment that prioritize both performance and interpretability.Transitioning from early manual extraction to genetic programming, the most advanced approach in the alpha factor mining domain currently employs reinforcement learning to mine a set of combination factors with fixed weights. However, the performance of resultant alpha factors exhibits inconsistency, and the inflexibility of fixed factor weights proves insufficient in adapting to the dynamic nature of financial markets. To address this issue, this paper proposes a two-stage formulaic alpha generating framework AlphaForge, for alpha factor mining and factor combination. This framework employs a generative-predictive neural network to generate factors, leveraging the robust spatial exploration capabilities inherent in deep learning while concurrently preserving diversity. The combination model within the framework incorporates the temporal performance of factors for selection and dynamically adjusts the weights assigned to each component alpha factor. Experiments conducted on real-world datasets demonstrate that our proposed model outperforms contemporary benchmarks in formulaic alpha factor mining. Furthermore, our model exhibits a notable enhancement in portfolio returns within the realm of quantitative investment and real money investment.

Suggested Citation

  • Hao Shi & Weili Song & Xinting Zhang & Jiahe Shi & Cuicui Luo & Xiang Ao & Hamid Arian & Luis Seco, 2024. "AlphaForge: A Framework to Mine and Dynamically Combine Formulaic Alpha Factors," Papers 2406.18394, arXiv.org, revised Aug 2024.
  • Handle: RePEc:arx:papers:2406.18394
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Tianping Zhang & Yuanqi Li & Yifei Jin & Jian Li, 2020. "AutoAlpha: an Efficient Hierarchical Evolutionary Algorithm for Mining Alpha Factors in Quantitative Investment," Papers 2002.08245, arXiv.org, revised Apr 2020.
    3. Sina Ehsani & Juhani T. Linnainmaa, 2022. "Factor Momentum and the Momentum Factor," Journal of Finance, American Finance Association, vol. 77(3), pages 1877-1919, June.
    4. Minyou Fan & Youwei Li & Ming Liao & Jiadong Liu, 2022. "A reexamination of factor momentum: How strong is it?," The Financial Review, Eastern Finance Association, vol. 57(3), pages 585-615, August.
    5. Zura Kakushadze, 2016. "101 Formulaic Alphas," Papers 1601.00991, arXiv.org, revised Mar 2016.
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