Teng Andrea Xu

Teng Andrea Xu, Bryan Kelly, Semyon Malamud

The recent discovery of the equivalence between infinitely wide neural networks (NNs) in the lazy training regime and Neural Tangent Kernels (NTKs) (Jacot et al., 2018) has revived interest in kernel methods. However, conventional wisdom suggests kernel methods are unsuitable for large samples due to their computational complexity and memory requirements. We introduce a novel random feature regression algorithm that allows us (when necessary) to scale to virtually infinite numbers of random features. We illustrate the performance of our method on the CIFAR-10 dataset.

Bryan Kelly, Boris Kuznetsov, Semyon Malamud et al.

We open up the black box behind Deep Learning for portfolio optimization and prove that a sufficiently wide and arbitrarily deep neural network (DNN) trained to maximize the Sharpe ratio of the Stochastic Discount Factor (SDF) is equivalent to a large factor model (LFM): A linear factor pricing model that uses many non-linear characteristics. The nature of these characteristics depends on the architecture of the DNN in an explicit, tractable fashion. This makes it possible to derive end-to-end trained DNN-based SDFs in closed form for the first time. We evaluate LFMs empirically and show how various architectural choices impact SDF performance. We document the virtue of depth complexity: With enough data, the out-of-sample performance of DNN-SDF is increasing in the NN depth, saturating at huge depths of around 100 hidden layers.

Semyon Malamud, Teng Andrea Xu, Antoine Didisheim

Recent progress in Generative Artificial Intelligence (AI) relies on efficient data representations, often featuring encoder-decoder architectures. We formalize the mathematical problem of finding the optimal encoder-decoder pair and characterize its solution, which we name the "benign autoencoder" (BAE). We prove that BAE projects data onto a manifold whose dimension is the optimal compressibility dimension of the generative problem. We highlight surprising connections between BAE and several recent developments in AI, such as conditional GANs, context encoders, stable diffusion, stacked autoencoders, and the learning capabilities of generative models. As an illustration, we show how BAE can find optimal, low-dimensional latent representations that improve the performance of a discriminator under a distribution shift. By compressing "malignant" data dimensions, BAE leads to smoother and more stable gradients.