 What is the value of the cross-sectional approach to deep reinforcement learning?Amine Mohamed Aboussalah, Ziyun Xu and Chi-Guhn Lee Quantitative Finance, 2022, vol. 22, issue 6, 1091-1111 Abstract: Reinforcement learning (RL) for dynamic asset allocation is an emerging field of study. Total return, the common performance metric, is useful for comparing algorithms but does not help us determine how close an RL algorithm is to an optimal solution. In real-world financial applications, a bad decision could prove to be fatal. One of the key ideas of our work is to combine the two paradigms of the mean-variance optimization approach (Markowitz criteria) and the optimal capital growth approach (Kelly criteria) via the actor-critic approach. By using an actor-critic approach, we can balance optimization of risk and growth by configuring the actor to optimize the mean-variance while the critic is configured to maximize growth. We propose a Geometric Policy Score used by the critic to assess the quality of the actions taken by the actor. This could allow portfolio manager practitioners to better understand the investment RL policy. We present an extensive and in-depth study of RL algorithms for use in portfolio management (PM). We studied eight published policy-based RL algorithms which are preferred over value-based RL because they are better suited for continuous action spaces and are considered to be state of the art, Deterministic Policy Gradient (DPG), Stochastic Policy Gradients (SPG), Deep Deterministic Policy Gradient (DDPG), Trust Region Policy Optimization (TRPO), Proximal Policy Optimization (PPO), Twin Delayed Deep Deterministic Policy Gradient (TD3), Soft Actor Critic (SAC), and Evolution Strategies (ES) for Policy Optimization. We implemented all eight and we were able to modify all of them for PM but our initial testing determined that their performance was not satisfactory. Most algorithms showed difficulty converging during the training process due to the non-stationary and noisy nature of financial environments, along with other challenges. We selected the four most promising algorithms DPG, SPG, DDPG, PPO for further improvements. The modification of RL algorithms to finance required unconventional changes. We have developed a novel approach for encoding multi-type financial data in a way that is compatible with RL. We use a multi-channel convolutional neural network (CNN-RL) framework, where each channel corresponds to a specific type of data such as high-low-open-close prices and volumes. We also designed a reward function based on concepts such as alpha, beta, and diversification that are financially meaningful while still being learnable by RL. In addition, portfolio managers will typically use a blend of time series analysis and cross-sectional analysis before making a decision. We extend our approach to incorporate, for the first time, cross-sectional deep RL in addition to time series RL. Finally, we demonstrate the performance of the RL agents and benchmark them against commonly used passive and active trading strategies, such as the uniform buy-and-hold (UBAH) index and the dynamical multi-period Mean-Variance-Optimization (MVO) model. Date: 2022 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:22:y:2022:i:6:p:1091-1111 Ordering information: This journal article can be ordered from DOI: 10.1080/14697688.2021.2001032 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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