Factor-Based Conditional Diffusion Model for Portfolio Optimization

Mengying He, Xuedong He, Xuefeng Gao

Keywords: Conditional Diffusion Model, High-Dimensional Return Generation, Portfolio Optimization, Asset-Specific Factors

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.

Submission Number: 80