Transfer Ranking in Finance: Applications to Cross-Sectional Momentum with Data Scarcity

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Transfer Ranking in Finance: Applications to Cross-Sectional Momentum with Data Scarcity

Daniel Poh
Stephen Roberts
Stefan Zohren
Published on 8/21/2022
Crypto
Momentum
Machine learning
Deep learning

This paper introduces Fused Encoder Networks (FEN), a novel transfer ranking model designed to address data scarcity in cross-sectional momentum strategies, particularly for cryptocurrencies with short trading histories. The model employs a hybrid parameter-sharing architecture: a source encoder block pre-trained on a larger foreign exchange (FX) dataset and a target encoder block trained on the smaller cryptocurrency dataset, with their outputs concatenated and passed through a fully connected layer. The self-attention mechanism within each encoder captures interactions among assets, enhancing ranking performance. The training process involves three steps: pre-training the source model on FX data, training the target model with the source encoder frozen, and fine-tuning the entire network with a low learning rate. Negative transfer is mitigated by selecting source models with high Sharpe ratios on a validation year. Experiments on the top 10 cryptocurrencies (2018-2021) show that FEN significantly outperforms benchmarks including risk-adjusted momentum, MLP, ListNet, LambdaMART, and a self-attention ranker with parameter sharing. FEN achieves a Sharpe ratio of 1.02, a threefold improvement over risk-adjusted momentum and ~50% over the best baseline, with superior ranking accuracy (NDCG@2=0.89) and robustness to transaction costs. The results demonstrate the effectiveness of transfer ranking in finance, offering a practical solution for deploying deep learning strategies on instruments with limited data.

Highlights

  • 1Proposes Fused Encoder Networks (FEN), a hybrid parameter-sharing transfer ranking model that combines source and target encoder-attention modules to address data scarcity in cross-sectional momentum strategies.
  • 2Demonstrates significant performance improvements on cryptocurrency momentum strategies, achieving a threefold boost in Sharpe ratio over risk-adjusted momentum and ~50% improvement over the best baseline.
  • 3Introduces a novel application of transfer learning to ranking in finance, leveraging self-attention to account for cross-instrument dependencies during training and inference.
  • 4Shows robustness to high transaction costs typical of cryptocurrency markets, outperforming state-of-the-art benchmarks including LambdaMART and self-attention rankers.

Methods

  • M
    Fused Encoder Networks (FEN): Dual encoder blocks (source pre-trained on FX data, target on crypto data) with concatenated outputs and listwise ListNet loss.
  • M
    Transfer learning pipeline: Pre-train source model on larger FX dataset, freeze source encoder, train target encoder on small crypto dataset, then fine-tune entire network with low learning rate.
  • M
    Self-attention mechanism (multi-head attention) to capture interactions among assets at the loss level.
  • M
    Expanding window training with early stopping and hyperparameter optimization via HyperOpt.

Results

  • R
    FEN achieves the highest Sharpe ratio (1.02) among all models, compared to 0.68 for the best baseline (SAR+ps) and 0.33 for risk-adjusted momentum (1WR).
  • R
    FEN outperforms baselines in NDCG@2 (0.89 vs. 0.84 for SAR+ps), indicating better ranking of top/bottom assets.
  • R
    FEN shows lower maximum drawdown (22.3%) and downside deviation (11.2%) compared to most baselines, with a Calmar ratio of 4.57.
  • R
    FEN maintains superior performance after accounting for high transaction costs (0.5% per trade), with Sharpe ratio still 0.85 vs. 0.55 for SAR+ps.
  • R
    FEN's hit rate (62.5%) is the highest among all models, indicating consistent positive returns.
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