TPLVM: Portfolio Construction by Student’s t -Process Latent Variable Model

Yusuke Uchiyama and Kei Nakagawa
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Yusuke Uchiyama: MAZIN Inc., 3-29-14 Nishi-Asakusa, Taito City, Tokyo 111-0035, Japan
Kei Nakagawa: NOMURA Asset Management Co. Ltd., 1-12-1 Nihonbashi, Chuo City, Tokyo 103-8260, Japan

Mathematics, 2020, vol. 8, issue 3, 1-10

Abstract: Optimal asset allocation is a key topic in modern finance theory. To realize the optimal asset allocation on investor’s risk aversion, various portfolio construction methods have been proposed. Recently, the applications of machine learning are rapidly growing in the area of finance. In this article, we propose the Student’s t -process latent variable model (TPLVM) to describe non-Gaussian fluctuations of financial timeseries by lower dimensional latent variables. Subsequently, we apply the TPLVM to portfolio construction as an alternative of existing nonlinear factor models. To test the performance of the proposed method, we construct minimum-variance portfolios of global stock market indices based on the TPLVM or Gaussian process latent variable model. By comparing these portfolios, we confirm the proposed portfolio outperforms that of the existing Gaussian process latent variable model.

Keywords: student’s t-process; latent variable model; factor model; Portfolio theory; global stock markets (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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