  Instead of conducting manual factor construction based on traditional and
behavioural finance analysis, academic researchers and quantitative investment
managers have leveraged Genetic Programming (GP) as an automatic feature
construction tool in recent years, which builds reverse polish mathematical
expressions from trading data into new factors. However, with the development
of deep learning, more powerful feature extraction tools are available. This
paper proposes Neural Network-based Automatic Factor Construction (NNAFC), a
tailored neural network framework that can automatically construct diversified
financial factors based on financial domain knowledge and a variety of neural
network structures. The experiment results show that NNAFC can construct more
informative and diversified factors than GP, to effectively enrich the current
factor pool. For the current market, both fully connected and recurrent neural
network structures are better at extracting information from financial time
series than convolution neural network structures. Moreover, new factors
constructed by NNAFC can always improve the return, Sharpe ratio, and the max
draw-down of a multi-factor quantitative investment strategy due to their
introducing more information and diversification to the existing factor pool.
