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Reinforcement Learning for Portfolio Management

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  • Angelos Filos

Abstract

In this thesis, we develop a comprehensive account of the expressive power, modelling efficiency, and performance advantages of so-called trading agents (i.e., Deep Soft Recurrent Q-Network (DSRQN) and Mixture of Score Machines (MSM)), based on both traditional system identification (model-based approach) as well as on context-independent agents (model-free approach). The analysis provides conclusive support for the ability of model-free reinforcement learning methods to act as universal trading agents, which are not only capable of reducing the computational and memory complexity (owing to their linear scaling with the size of the universe), but also serve as generalizing strategies across assets and markets, regardless of the trading universe on which they have been trained. The relatively low volume of daily returns in financial market data is addressed via data augmentation (a generative approach) and a choice of pre-training strategies, both of which are validated against current state-of-the-art models. For rigour, a risk-sensitive framework which includes transaction costs is considered, and its performance advantages are demonstrated in a variety of scenarios, from synthetic time-series (sinusoidal, sawtooth and chirp waves), simulated market series (surrogate data based), through to real market data (S\&P 500 and EURO STOXX 50). The analysis and simulations confirm the superiority of universal model-free reinforcement learning agents over current portfolio management model in asset allocation strategies, with the achieved performance advantage of as much as 9.2\% in annualized cumulative returns and 13.4\% in annualized Sharpe Ratio.

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  • Angelos Filos, 2019. "Reinforcement Learning for Portfolio Management," Papers 1909.09571, arXiv.org.
  • Handle: RePEc:arx:papers:1909.09571
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    Cited by:

    1. MohammadAmin Fazli & Mahdi Lashkari & Hamed Taherkhani & Jafar Habibi, 2022. "A Novel Experts Advice Aggregation Framework Using Deep Reinforcement Learning for Portfolio Management," Papers 2212.14477, arXiv.org.
    2. Ariel Neufeld & Julian Sester & Mario v{S}iki'c, 2022. "Markov Decision Processes under Model Uncertainty," Papers 2206.06109, arXiv.org, revised Jan 2023.
    3. Ariel Neufeld & Julian Sester & Mario Šikić, 2023. "Markov decision processes under model uncertainty," Mathematical Finance, Wiley Blackwell, vol. 33(3), pages 618-665, July.
    4. Huanming Zhang & Zhengyong Jiang & Jionglong Su, 2021. "A Deep Deterministic Policy Gradient-based Strategy for Stocks Portfolio Management," Papers 2103.11455, arXiv.org.
    5. Adrian Millea, 2021. "Deep Reinforcement Learning for Trading—A Critical Survey," Data, MDPI, vol. 6(11), pages 1-25, November.
    6. Kumar Yashaswi, 2021. "Deep Reinforcement Learning for Portfolio Optimization using Latent Feature State Space (LFSS) Module," Papers 2102.06233, arXiv.org.
    7. Matias Selser & Javier Kreiner & Manuel Maurette, 2021. "Optimal Market Making by Reinforcement Learning," Papers 2104.04036, arXiv.org.
    8. Ruan Pretorius & Terence van Zyl, 2022. "Deep Reinforcement Learning and Convex Mean-Variance Optimisation for Portfolio Management," Papers 2203.11318, arXiv.org.
    9. Gang Huang & Xiaohua Zhou & Qingyang Song, 2020. "Deep reinforcement learning for portfolio management," Papers 2012.13773, arXiv.org, revised Apr 2022.

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