Sparse Autoencoders as Implicit Diversification Regularisers for Cross-Sectional Cryptocurrency Returns

Factor models are central to asset pricing and portfolio construction, but neural factors are often difficult to interpret, and their effect on portfolio risk is unclear. A sparse autoencoder (SAE) may address both concerns by describing daily returns across many assets with only a few active features. We ask whether this sparse representation produces stable financial factors and better-diversified portfolios. We study cryptocurrency returns, use equities as a secondary test, and compare the SAE with common benchmarks in a time-ordered evaluation. We find consistently lower volatility in SAE portfolios and link this result to lower correlations among the selected assets. However, the SAE does not outperform a simple contrarian strategy on risk-adjusted return, and its factor identities are not stable across training runs. Our contribution is to show that sparse coding can support portfolio diversification, while clearly separating this risk effect from claims about alpha or stable factor identities.

Authors

Publication Details

Journal
arXiv (Cornell University)
Published
2026-10-29
DOI
https://doi.org/10.48550/arxiv.2610.39205
Primary Topic
Financial Markets and Investment Strategies
Type
preprint
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preprint

Sparse Autoencoders as Implicit Diversification Regularisers for Cross-Sectional Cryptocurrency Returns

Weijia Han, Lisha Qu
arXiv (Cornell University)
Financial Markets and Investment Strategies
preprint

Sparse Autoencoders as Implicit Diversification Regularisers for Cross-Sectional Cryptocurrency Returns

Weijia Han, Lisha Qu
preprint en

Abstract

Factor models are central to asset pricing and portfolio construction, but neural factors are often difficult to interpret, and their effect on portfolio risk is unclear. A sparse autoencoder (SAE) may address both concerns by describing daily returns across many assets with only a few active features. We ask whether this sparse representation produces stable financial factors and better-diversified portfolios. We study cryptocurrency returns, use equities as a secondary test, and compare the SAE with common benchmarks in a time-ordered evaluation. We find consistently lower volatility in SAE portfolios and link this result to lower correlations among the selected assets. However, the SAE does not outperform a simple contrarian strategy on risk-adjusted return, and its factor identities are not stable across training runs. Our contribution is to show that sparse coding can support portfolio diversification, while clearly separating this risk effect from claims about alpha or stable factor identities.

arXiv (Cornell University)
Financial Markets and Investment Strategies
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