Factor-Based Conditional Diffusion Model for Portfolio Optimization
Factor-Based Conditional Diffusion Model for Portfolio Optimization ArXiv ID: 2509.22088 “View on arXiv” Authors: Xuefeng Gao, Mengying He, Xuedong He 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. ...