Balancing Profit, Risk, and Sustainability for Portfolio Management

Charl Maree and Christian W. Omlin

Papers from arXiv.org

Abstract: Stock portfolio optimization is the process of continuous reallocation of funds to a selection of stocks. This is a particularly well-suited problem for reinforcement learning, as daily rewards are compounding and objective functions may include more than just profit, e.g., risk and sustainability. We developed a novel utility function with the Sharpe ratio representing risk and the environmental, social, and governance score (ESG) representing sustainability. We show that a state-of-the-art policy gradient method - multi-agent deep deterministic policy gradients (MADDPG) - fails to find the optimum policy due to flat policy gradients and we therefore replaced gradient descent with a genetic algorithm for parameter optimization. We show that our system outperforms MADDPG while improving on deep Q-learning approaches by allowing for continuous action spaces. Crucially, by incorporating risk and sustainability criteria in the utility function, we improve on the state-of-the-art in reinforcement learning for portfolio optimization; risk and sustainability are essential in any modern trading strategy and we propose a system that does not merely report these metrics, but that actively optimizes the portfolio to improve on them.

Date: 2022-06
New Economics Papers: this item is included in nep-big, nep-cmp, nep-fmk and nep-upt
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Citations: View citations in EconPapers (2)

Published in IEEE CIFEr (2022)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2207.02134

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