Risk-Sensitive Deep Reinforcement Learning for Portfolio Optimization

Xinyao Wang and Lili Liu ()
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Xinyao Wang: School of Computing, National University of Singapore, Singapore 117417, Singapore
Lili Liu: Department of Information Systems and Analytics, School of Computing, National University of Singapore, Singapore 117417, Singapore

JRFM, 2025, vol. 18, issue 7, 1-22

Abstract: Navigating the complexity of petroleum futures markets—marked by extreme volatility, geopolitical uncertainty, and macroeconomic shocks—demands adaptive and risk-sensitive strategies. This paper explores an Adaptive Risk-sensitive Transformer-based Deep Reinforcement Learning (ART-DRL) framework to improve portfolio optimization in commodity futures trading. While deep reinforcement learning (DRL) has been applied in equities and forex, its use in commodities remains underexplored. We evaluate DRL models, including Deep Q-Networks (DQN), Proximal Policy Optimization (PPO), Advantage Actor-Critic (A2C), and Deep Deterministic Policy Gradient (DDPG), integrating dynamic reward functions and asset-specific optimization. Empirical results show improvements in risk-adjusted performance, with an annualized return of 1.353, a Sharpe Ratio of 4.340, and a Sortino Ratio of 57.766. Although the return is below DQN (1.476), the proposed model achieves better stability and risk control. Notably, the models demonstrate resilience by learning from historical periods of extreme volatility, including the COVID-19 pandemic (2020–2021) and geopolitical shocks such as the Russia–Ukraine conflict (2022), despite testing commencing in January 2023. This research offers a practical, data-driven framework for risk-sensitive decision-making in commodities, showing how machine learning can support portfolio management under volatile market conditions.

Keywords: adaptive system; agent-based modeling; deep reinforcement learning; commodity futures; portfolio optimization; volatility modeling; risk management; investment management (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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