Factor-Based Conditional Diffusion Model for Portfolio Optimization

• URL: http://arxiv.org/abs/2509.22088v1
• Date: Fri, 26 Sep 2025 09:11:08 GMT
• Title: Factor-Based Conditional Diffusion Model for Portfolio Optimization
• Abstract summary: We propose a novel conditional diffusion model for portfolio optimization.<n>It learns the cross-sectional distribution of next-day stock returns conditioned on asset-specific factors.<n> Empirical results on the Chinese A-share market show that our approach consistently outperforms benchmark methods.
• Score: 8.18198392834469
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: We propose a novel conditional diffusion model for portfolio optimization that learns the cross-sectional distribution of next-day stock returns conditioned on asset-specific factors. The model builds on the Diffusion Transformer with token-wise conditioning, linking each asset's return to its own factor vector while capturing cross-asset dependencies. Generated return samples are used for daily mean-variance optimization under realistic constraints. Empirical results on the Chinese A-share market show that our approach consistently outperforms benchmark methods based on standard empirical and shrinkage-based estimators across multiple metrics.

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