Deep learning based residuals in non-linear factor models: Precision matrix estimation of returns with low signal-to-noise ratio

This paper introduces a consistent estimator and rate of convergence for the precision matrix of asset returns in large portfolios using a non-linear factor model within the deep learning framework. Our estimator remains valid even in low signal-to-noise ratio environments typical for financial markets and is compatible with the weak factor framework. Our theoretical analysis establishes uniform bounds on expected estimation risk based on deep neural networks for an expanding number of assets. Additionally, we provide a new consistent data-dependent estimator of error covariance in deep neural networks. Our models demonstrate superior accuracy in extensive simulations and the empirical application.

Authors

Publication Details

Journal
Journal of Econometrics
Published
2025-08-20
DOI
https://doi.org/10.1016/j.jeconom.2025.106083
Primary Topic
Financial Risk and Volatility Modeling
Type
article
Field-Weighted Citation Impact
0.00
Controls
|||
ALL TIME
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
article

Deep learning based residuals in non-linear factor models: Precision matrix estimation of returns with low signal-to-noise ratio

Mehmet Caner, Maurizio Daniele
Journal of Econometrics
Financial Risk and Volatility Modeling
article

Deep learning based residuals in non-linear factor models: Precision matrix estimation of returns with low signal-to-noise ratio

Mehmet Caner, Maurizio Daniele
article en

Abstract

This paper introduces a consistent estimator and rate of convergence for the precision matrix of asset returns in large portfolios using a non-linear factor model within the deep learning framework. Our estimator remains valid even in low signal-to-noise ratio environments typical for financial markets and is compatible with the weak factor framework. Our theoretical analysis establishes uniform bounds on expected estimation risk based on deep neural networks for an expanding number of assets. Additionally, we provide a new consistent data-dependent estimator of error covariance in deep neural networks. Our models demonstrate superior accuracy in extensive simulations and the empirical application.

Journal of EconometricsVol. 251
Openalex Percentile: Top 72%
Financial Risk and Volatility Modeling
AI Navigator

Ask Laika to Summarize, Analyze, and Connect papers live on the map.

Summarize Papers & Methodologies

Extract key findings, datasets, and comparative methods across publications.

Benchmark Rankings & Visual Analytics

Rank top research institutions, authors, funders, topics, and journals by Field-Weighted Citation Impact (FWCI) and paper volume with instant charts.

Connect Distant Disciplines

Bridge topological clusters on the map to find hidden collaborative intersections.