Reinforcement Learning in Financial Markets

Terry Lingze Meng and Matloob Khushi
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Terry Lingze Meng: School of Computer Science, Building J12, University of Sydney, 1 Cleveland Street, Darlington, NSW 2006, Australia
Matloob Khushi: School of Computer Science, Building J12, University of Sydney, 1 Cleveland Street, Darlington, NSW 2006, Australia

Data, 2019, vol. 4, issue 3, 1-17

Abstract: Recently there has been an exponential increase in the use of artificial intelligence for trading in financial markets such as stock and forex. Reinforcement learning has become of particular interest to financial traders ever since the program AlphaGo defeated the strongest human contemporary Go board game player Lee Sedol in 2016. We systematically reviewed all recent stock/forex prediction or trading articles that used reinforcement learning as their primary machine learning method. All reviewed articles had some unrealistic assumptions such as no transaction costs, no liquidity issues and no bid or ask spread issues. Transaction costs had significant impacts on the profitability of the reinforcement learning algorithms compared with the baseline algorithms tested. Despite showing statistically significant profitability when reinforcement learning was used in comparison with baseline models in many studies, some showed no meaningful level of profitability, in particular with large changes in the price pattern between the system training and testing data. Furthermore, few performance comparisons between reinforcement learning and other sophisticated machine/deep learning models were provided. The impact of transaction costs, including the bid/ask spread on profitability has also been assessed. In conclusion, reinforcement learning in stock/forex trading is still in its early development and further research is needed to make it a reliable method in this domain.

Keywords: reinforcement learning; stock market; foreign exchange market; trading; forecasts (search for similar items in EconPapers)
JEL-codes: C8 C80 C81 C82 C83 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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