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Deep Learning in Long-Short Stock Portfolio Allocation: An Empirical Study

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  • Junjie Guo

Abstract

This paper provides an empirical study explores the application of deep learning algorithms-Multilayer Perceptron (MLP), Convolutional Neural Networks (CNN), Long Short-Term Memory (LSTM), and Transformer-in constructing long-short stock portfolios. Two datasets comprising randomly selected stocks from the S&P500 and NASDAQ indices, each spanning a decade of daily data, are utilized. The models predict daily stock returns based on historical features such as past returns,Relative Strength Index (RSI), trading volume, and volatility. Portfolios are dynamically adjusted by longing stocks with positive predicted returns and shorting those with negative predictions, with equal asset weights. Performance is evaluated over a two-year testing period, focusing on return, Sharpe ratio, and maximum drawdown metrics. The results demonstrate the efficacy of deep learning models in enhancing long-short stock portfolio performance.

Suggested Citation

  • Junjie Guo, 2024. "Deep Learning in Long-Short Stock Portfolio Allocation: An Empirical Study," Papers 2411.13555, arXiv.org, revised Nov 2024.
    • Handle: RePEc:arx:papers:2411.13555
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    References listed on IDEAS

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    1. Wei Bao & Jun Yue & Yulei Rao, 2017. "A deep learning framework for financial time series using stacked autoencoders and long-short term memory," PLOS ONE, Public Library of Science, vol. 12(7), pages 1-24, July.
    2. Yu Cheng & Junjie Guo & Shiqing Long & You Wu & Mengfang Sun & Rong Zhang, 2024. "Advanced Financial Fraud Detection Using GNN-CL Model," Papers 2407.06529, arXiv.org.
    3. Fischer, Thomas & Krauss, Christopher, 2018. "Deep learning with long short-term memory networks for financial market predictions," European Journal of Operational Research, Elsevier, vol. 270(2), pages 654-669.
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