Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/270745.2 
Year of Publication: 
2025
Series/Report no.: 
CFR Working Paper No. 23-01
Version Description: 
This Version: February 2025
Publisher: 
University of Cologne, Centre for Financial Research (CFR), Cologne
Abstract: 
We consider parametric portfolio policies of any complexity using deep neural networks to optimize investor utility. Risk aversion acts as an economic regularization mechanism, with higher risk aversion constraining model complexity. Empirically, Deep Parametric Portfolio Policies (DPPP) generate 43-102 basis points higher monthly certainty equivalent returns compared to linear policies. Looking beyond expected returns, non-linear portfolio policies better capture the complex relationship between investor preferences and firm characteristics but the benefits of using complex models vary with investor preferences. Results hold across different utility functions and remain robust to transaction costs and short-selling restrictions.
Subjects: 
Portfolio Choice
Machine Learning
Expected Utility
JEL: 
G11
G12
C58
C45
Document Type: 
Working Paper

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2 10419/270745.2 This Version: February 2025
1 10419/270745 This Version: February 2023

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