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Deep Reinforcement Learning and Convex Mean-Variance Optimisation for Portfolio Management

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posted on 22.02.2022, 00:24 authored by Ruan PretoriusRuan Pretorius, Terence van Zyl
Traditional portfolio management methods can incorporate specific investor preferences but rely on accurate forecasts of asset returns and covariances. Reinforcement learning (RL) methods do not rely on these explicit forecasts and are better suited for multi-stage decision processes. To address limitations of the evaluated research, experiments were conducted on three markets in different economies with different overall trends. By incorporating specific investor preferences into our RL models’ reward functions, a more comprehensive comparison could be made to traditional methods in risk-return space. Transaction costs were also modelled more realistically by including nonlinear changes introduced by market volatility and trading volume. The results of this study suggest that there can be an advantage to using RL methods compared to traditional convex mean-variance optimisation methods under certain market conditions. Our RL models could significantly outperform traditional single-period optimisation (SPO) and multi-period optimisation (MPO) models in upward trending markets, but only up to specific risk limits. In sideways trending markets, the performance of SPO and MPO models can be closely matched by our RL models for the majority of the excess risk range tested. The specific market conditions under which these models could outperform each other highlight the importance of a more comprehensive comparison of Pareto optimal frontiers in risk-return space. These frontiers give investors a more granular view of which models might provide better performance for their specific risk tolerance or return targets.

Funding

DSI-NICIS National e-Science Postgraduate Teaching and Training Platform (NEPTTP)

History

Email Address of Submitting Author

pretoriusr.7@gmail.com

ORCID of Submitting Author

0000-0003-1738-9035

Submitting Author's Institution

University of The Witwatersrand

Submitting Author's Country

South Africa