Year: 2025
Type: article
Abstract: Traditional linear factor models often fail to capture the complex, non-linear dynamics of emerging stock markets. This research designs and validates a novel Recurrence Plot (RP) matrices with β-VAE deep learning methodology to discover non-linear investment factors within the Indonesian context. We demonstrate that this framework is a systematically superior "factor factory" compared to a linear RP with PCA baseline, discovering twice as many high-quality factors (Sharpe > 0.3) and generating 7-fold more alpha on average. A key finding is the model's ability to disentangle high-frequency predictive signals (identified by SHAP) from more valuable, low-frequency profitable trends (validated by backtesting). The champion factor from this process yields a robust annualized alpha of 6.65% with a minimal max drawdown of -7.73% from 2018 to 2025. This study concludes that the RP -> β -VAE approach is a robust and resilient framework for discovering safer, non-linear sources of return unexplained by conventional models.
Institution: Universitas Dian Nuswantoro
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $13
OpenAlex ID: W7117975690