arXiv subjects

Hyunglip Bae

Publications and source records attributed to Hyunglip Bae.

7 recordsLinked to original sources

arXiv2026

Decision-focused Sparse Tangent Portfolio Optimization

Sparse tangent portfolio optimization aims to learn an interpretable, low-cardinality portfolio in the tangency direction of the mean-variance frontier. However, the associated cardinality-constrained formulation is NP-hard, and standard predict-then-optimize pipelines often misalign forecasting accuracy with downstream portfolio quality. We propose an end-to-end decision-focused learning framework that reformulates Sharpe ratio maximization as a Disciplined Parametrized Programming (DPP)-compliant convex programming layer and replaces discrete selection with a smooth top-$k$ operator enforcing an exact cardinality $k$. This enables gradient flow through prediction, asset selection, and re-optimization, allowing the predictive model to directly optimize portfolio performance. Across four major equity markets, our method achieves competitive and often superior out-of-sample Sharpe ratios compared with historical and prediction-focused baselines, with particularly strong gains in larger asset universes. Our \href{https://github.com/feuerwerksh/Diffble-card-SR}{code} is publicly available.

cs.LG↗

arXiv2025

Return Prediction for Mean-Variance Portfolio Selection: How Decision-Focused Learning Shapes Forecasting Models

Markowitz laid the foundation of portfolio theory through the mean-variance optimization (MVO) framework. However, the effectiveness of MVO is contingent on the precise estimation of expected returns, variances, and covariances of asset returns, which are typically uncertain. Machine learning models are becoming useful in estimating uncertain parameters, and such models are trained to minimize prediction errors, such as mean squared errors (MSE), which treat prediction errors uniformly across assets. Recent studies have pointed out that this approach would lead to suboptimal decisions and proposed Decision-Focused Learning (DFL) as a solution, integrating prediction and optimization to improve decision-making outcomes. While studies have shown DFL's potential to enhance portfolio performance, the detailed mechanisms of how DFL modifies prediction models for MVO remain unexplored. This study investigates how DFL adjusts stock return prediction models to optimize decisions in MVO. Theoretically, we show that DFL's gradient can be interpreted as tilting the MSE-based prediction errors by the inverse covariance matrix, effectively incorporating inter-asset correlations into the learning process, while MSE treats each asset's error independently. This tilting mechanism leads to systematic prediction biases where DFL overestimates returns for assets included in portfolios while underestimating excluded assets. Our findings reveal why DFL achieves superior portfolio performance despite higher prediction errors. The strategic biases are features, not flaws.

q-fin.PM↗

arXiv2025

Prediction Loss Guided Decision-Focused Learning

Decision-making under uncertainty is often considered in two stages: predicting the unknown parameters, and then optimizing decisions based on predictions. While traditional prediction-focused learning (PFL) treats these two stages separately, decision-focused learning (DFL) trains the predictive model by directly optimizing the decision quality in an end-to-end manner. However, despite using exact or well-approximated gradients, vanilla DFL often suffers from unstable convergence due to its flat-and-sharp loss landscapes. In contrast, PFL yields more stable optimization, but overlooks the downstream decision quality. To address this, we propose a simple yet effective approach: perturbing the decision loss gradient using the prediction loss gradient to construct an update direction. Our method requires no additional training and can be integrated with any DFL solvers. Using the sigmoid-like decaying parameter, we let the prediction loss gradient guide the decision loss gradient to train a predictive model that optimizes decision quality. Also, we provide a theoretical convergence guarantee to Pareto stationary point under mild assumptions. Empirically, we demonstrate our method across three stochastic optimization problems, showing promising results compared to other baselines. We validate that our approach achieves lower regret with more stable training, even in situations where either PFL or DFL struggles.

cs.LG↗

arXiv2025

A Cholesky decomposition-based asset selection heuristic for sparse tangent portfolio optimization

In practice, including large number of assets in mean-variance portfolios can lead to higher transaction costs and management fees. To address this, one common approach is to select a smaller subset of assets from the larger pool, constructing more efficient portfolios. As a solution, we propose a new asset selection heuristic which generates a pre-defined list of asset candidates using a surrogate formulation and re-optimizes the cardinality-constrained tangent portfolio with these selected assets. This method enables faster optimization and effectively constructs portfolios with fewer assets, as demonstrated by numerical analyses on historical stock returns. Finally, we discuss a quantitative metric that can provide a initial assessment of the performance of the proposed heuristic based on asset covariance.

q-fin.MF↗

arXiv2025

Locally Convex Global Loss Network for Decision-Focused Learning

In decision-making problems under uncertainty, predicting unknown parameters is often considered independent of the optimization part. Decision-focused learning (DFL) is a task-oriented framework that integrates prediction and optimization by adapting the predictive model to give better decisions for the corresponding task. Here, an inevitable challenge arises when computing the gradients of the optimal decision with respect to the parameters. Existing research copes with this issue by smoothly reforming surrogate optimization or constructing surrogate loss functions that mimic task loss. However, they are applied to restricted optimization domains. In this paper, we propose Locally Convex Global Loss Network (LCGLN), a global surrogate loss model that can be implemented in a general DFL paradigm. LCGLN learns task loss via a partial input convex neural network which is guaranteed to be convex for chosen inputs while keeping the non-convex global structure for the other inputs. This enables LCGLN to admit general DFL through only a single surrogate loss without any sense for choosing appropriate parametric forms. We confirm the effectiveness and flexibility of LCGLN by evaluating our proposed model with three stochastic decision-making problems.

cs.LG↗

arXiv2024

Transformer-based Stagewise Decomposition for Large-Scale Multistage Stochastic Optimization

Solving large-scale multistage stochastic programming (MSP) problems poses a significant challenge as commonly used stagewise decomposition algorithms, including stochastic dual dynamic programming (SDDP), face growing time complexity as the subproblem size and problem count increase. Traditional approaches approximate the value functions as piecewise linear convex functions by incrementally accumulating subgradient cutting planes from the primal and dual solutions of stagewise subproblems. Recognizing these limitations, we introduce TranSDDP, a novel Transformer-based stagewise decomposition algorithm. This innovative approach leverages the structural advantages of the Transformer model, implementing a sequential method for integrating subgradient cutting planes to approximate the value function. Through our numerical experiments, we affirm TranSDDP's effectiveness in addressing MSP problems. It efficiently generates a piecewise linear approximation for the value function, significantly reducing computation time while preserving solution quality, thus marking a promising progression in the treatment of large-scale multistage stochastic programming problems.

cs.LG↗

arXiv2023

Universal Approximation of Parametric Optimization via Neural Networks with Piecewise Linear Policy Approximation

Parametric optimization solves a family of optimization problems as a function of parameters. It is a critical component in situations where optimal decision making is repeatedly performed for updated parameter values, but computation becomes challenging when complex problems need to be solved in real-time. Therefore, in this study, we present theoretical foundations on approximating optimal policy of parametric optimization problem through Neural Networks and derive conditions that allow the Universal Approximation Theorem to be applied to parametric optimization problems by constructing piecewise linear policy approximation explicitly. This study fills the gap on formally analyzing the constructed piecewise linear approximation in terms of feasibility and optimality and show that Neural Networks (with ReLU activations) can be valid approximator for this approximation in terms of generalization and approximation error. Furthermore, based on theoretical results, we propose a strategy to improve feasibility of approximated solution and discuss training with suboptimal solutions.

math.OC↗