Time your hedge with Deep Reinforcement Learning
Benhamou, Éric; Saltiel, David; Ungari, Sandrine; Mukhopadhyay, Abhishek (2020), Time your hedge with Deep Reinforcement Learning. https://basepub.dauphine.psl.eu/handle/123456789/22201
TypeDocument de travail / Working paper
Series titlePreprint Lamsade
MetadataShow full item record
Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision [LAMSADE]
Abstract (EN)Can an asset manager plan the optimal timing for her/his hedging strategies given market conditions? The standard approach based on Markowitz or other more or less sophisticated financial rules aims to find the best portfolio allocation thanks to forecasted expected returns and risk but fails to fully relate market conditions to hedging strategies decision. In contrast, Deep Reinforcement Learning (DRL) can tackle this challenge by creating a dynamic dependency between market information and hedging strategies allocation decisions. In this paper, we present a realistic and augmented DRL framework that: (i) uses additional contextual information to decide an action, (ii) has a one period lag between observations and actions to account for one day lag turnover of common asset managers to rebalance their hedge, (iii) is fully tested in terms of stability and robustness thanks to a repetitive train test method called anchored walk forward training, similar in spirit to k fold cross validation for time series and (iv) allows managing leverage of our hedging strategy. Our experiment for an augmented asset manager interested in sizing and timing his hedges shows that our approach achieves superior returns and lower risk.
Subjects / Keywordsasset manager
Showing items related by title and author.
Distinguish the indistinguishable: a Deep Reinforcement Learning approach for volatility targeting models Benhamou, Éric; Saltiel, David; Tabachnik, Serge; Wong, Sui Kai; Chareyron, François (2021) Document de travail / Working paper