Recent advances in nonlinear shrinkage yield asymptotically optimal cleaners for large covariance matrices and have been extended to empirical cross-covariances via singular-value shrinkage. However, these approaches rely on stationarity and bounded-spectrum assumptions that are violated by real equity returns, which exhibit dependence drift and macroscopic common modes. We propose a physics-informed neural estimator that parameterizes the cleaned cross-covariance matrix in the empirical singular-vector basis and learns a nonlinear map from empirical singular values and marginal projections to cleaned singular values, recovering the cleaning performances of the analytical solution as a limiting case. On U.S. equity data, the learned correction not only improves out-of-sample cross-covariance prediction but also translates these statistical gains into better tracking-error minimization for portfolio replication. Furthermore, it remains stable in regimes where the analytical cross-covariance estimation deteriorates with universe size, suggesting an interpolation between sample-size denoising and a learned forecast correction under non-stationary dependence.

Manolakis, E., Bongiorno, C., Mantegna, R.N. (2026). Physics-informed singular-value learning for cross-covariances forecasting in financial markets. FINANCE RESEARCH LETTERS, 110 [10.1016/j.frl.2026.110602].

Physics-informed singular-value learning for cross-covariances forecasting in financial markets

Manolakis, Efstratios
Primo
;
Bongiorno, Christian
;
Mantegna, Rosario N.
Ultimo
2026-11-01

Abstract

Recent advances in nonlinear shrinkage yield asymptotically optimal cleaners for large covariance matrices and have been extended to empirical cross-covariances via singular-value shrinkage. However, these approaches rely on stationarity and bounded-spectrum assumptions that are violated by real equity returns, which exhibit dependence drift and macroscopic common modes. We propose a physics-informed neural estimator that parameterizes the cleaned cross-covariance matrix in the empirical singular-vector basis and learns a nonlinear map from empirical singular values and marginal projections to cleaned singular values, recovering the cleaning performances of the analytical solution as a limiting case. On U.S. equity data, the learned correction not only improves out-of-sample cross-covariance prediction but also translates these statistical gains into better tracking-error minimization for portfolio replication. Furthermore, it remains stable in regimes where the analytical cross-covariance estimation deteriorates with universe size, suggesting an interpolation between sample-size denoising and a learned forecast correction under non-stationary dependence.
nov-2026
Settore PHYS-06/A - Fisica per le scienze della vita, l'ambiente e i beni culturali
Manolakis, E., Bongiorno, C., Mantegna, R.N. (2026). Physics-informed singular-value learning for cross-covariances forecasting in financial markets. FINANCE RESEARCH LETTERS, 110 [10.1016/j.frl.2026.110602].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10447/720083
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