Risk-Aware Multi-Armed Bandit Problem with Application to Portfolio Selection

Xiaoguang Huo and Feng Fu

Papers from arXiv.org

Abstract: Sequential portfolio selection has attracted increasing interests in the machine learning and quantitative finance communities in recent years. As a mathematical framework for reinforcement learning policies, the stochastic multi-armed bandit problem addresses the primary difficulty in sequential decision making under uncertainty, namely the exploration versus exploitation dilemma, and therefore provides a natural connection to portfolio selection. In this paper, we incorporate risk-awareness into the classic multi-armed bandit setting and introduce an algorithm to construct portfolio. Through filtering assets based on the topological structure of financial market and combining the optimal multi-armed bandit policy with the minimization of a coherent risk measure, we achieve a balance between risk and return.

Date: 2017-09
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Citations: View citations in EconPapers (7)

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