Exploiting Risk-Aversion and Size-dependent fees in FX Trading with Fitted Natural Actor-Critic ArXiv ID: 2410.23294 “View on arXiv” Authors: Unknown Abstract In recent years, the popularity of artificial intelligence has surged due to its widespread application in various fields. The financial sector has harnessed its advantages for multiple purposes, including the development of automated trading systems designed to interact autonomously with markets to pursue different aims. In this work, we focus on the possibility of recognizing and leveraging intraday price patterns in the Foreign Exchange market, known for its extensive liquidity and flexibility. Our approach involves the implementation of a Reinforcement Learning algorithm called Fitted Natural Actor-Critic. This algorithm allows the training of an agent capable of effectively trading by means of continuous actions, which enable the possibility of executing orders with variable trading sizes. This feature is instrumental to realistically model transaction costs, as they typically depend on the order size. Furthermore, it facilitates the integration of risk-averse approaches to induce the agent to adopt more conservative behavior. The proposed approaches have been empirically validated on EUR-USD historical data. ...

Generalized Distribution Prediction for Asset Returns ArXiv ID: 2410.23296 “View on arXiv” Authors: Unknown Abstract We present a novel approach for predicting the distribution of asset returns using a quantile-based method with Long Short-Term Memory (LSTM) networks. Our model is designed in two stages: the first focuses on predicting the quantiles of normalized asset returns using asset-specific features, while the second stage incorporates market data to adjust these predictions for broader economic conditions. This results in a generalized model that can be applied across various asset classes, including commodities, cryptocurrencies, as well as synthetic datasets. The predicted quantiles are then converted into full probability distributions through kernel density estimation, allowing for more precise return distribution predictions and inferencing. The LSTM model significantly outperforms a linear quantile regression baseline by 98% and a dense neural network model by over 50%, showcasing its ability to capture complex patterns in financial return distributions across both synthetic and real-world data. By using exclusively asset-class-neutral features, our model achieves robust, generalizable results. ...

Quantum Computing for Multi Period Asset Allocation ArXiv ID: 2410.11997 “View on arXiv” Authors: Unknown Abstract Portfolio construction has been a long-standing topic of research in finance. The computational complexity and the time taken both increase rapidly with the number of investments in the portfolio. It becomes difficult, even impossible for classic computers to solve. Quantum computing is a new way of computing which takes advantage of quantum superposition and entanglement. It changes how such problems are approached and is not constrained by some of the classic computational complexity. Studies have shown that quantum computing can offer significant advantages over classical computing in many fields. The application of quantum computing has been constrained by the unavailability of actual quantum computers. In the past decade, there has been the rapid development of the large-scale quantum computer. However, software development for quantum computing is slow in many fields. In our study, we apply quantum computing to a multi-asset portfolio simulation. The simulation is based on historic data, covariance, and expected returns, all calculated using quantum computing. Although technically a solvable problem for classical computing, we believe the software development is important to the future application of quantum computing in finance. We conducted this study through simulation of a quantum computer and the use of Rensselaer Polytechnic Institute’s IBM quantum computer. ...

Solving The Dynamic Volatility Fitting Problem: A Deep Reinforcement Learning Approach ArXiv ID: 2410.11789 “View on arXiv” Authors: Unknown Abstract The volatility fitting is one of the core problems in the equity derivatives business. Through a set of deterministic rules, the degrees of freedom in the implied volatility surface encoding (parametrization, density, diffusion) are defined. Whilst very effective, this approach widespread in the industry is not natively tailored to learn from shifts in market regimes and discover unsuspected optimal behaviors. In this paper, we change the classical paradigm and apply the latest advances in Deep Reinforcement Learning(DRL) to solve the fitting problem. In particular, we show that variants of Deep Deterministic Policy Gradient (DDPG) and Soft Actor Critic (SAC) can achieve at least as good as standard fitting algorithms. Furthermore, we explain why the reinforcement learning framework is appropriate to handle complex objective functions and is natively adapted for online learning. ...

Aproximación práctica a los métodos de selección de portafolios de inversión ArXiv ID: 2410.11070 “View on arXiv” Authors: Unknown Abstract This paper explores the practical approach to portfolio selection methods for investments. The study delves into portfolio theory, discussing concepts such as expected return, variance, asset correlation, and opportunity sets. It also presents the efficient frontier and its application in the Markowitz model, which employs mean-variance optimization techniques. An alternative approach based on the mean-semivariance model is introduced. This model accounts for the skewness and kurtosis of the asset return distribution, providing a more comprehensive view of risk and return. The study also addresses the practical implementation of these models, including the use of genetic algorithms to optimize portfolio selection. Additionally, transaction costs and integer constraints in portfolio optimization are considered, demonstrating the applicability of the Markowitz model. Este documento explorar la aproximación práctica a los métodos de selección de portafolios para inversiones. El estudio profundiza en la teoría de los portafolios, discutiendo conceptos como el rendimiento esperado, la varianza, la correlación entre activos y los conjuntos de oportunidades. También presenta la frontera eficiente y su aplicación en el modelo de Markowitz, que utiliza técnicas de optimización media-varianza. Se introduce un enfoque alternativo basado en el modelo media-semivarianza. Este modelo tiene en cuenta la asimetría y la curtosis de la distribución de retornos de los activos, proporcionando una visión más completa de riesgo y rendimiento. El estudio también aborda la implementación práctica de estos modelos, incluyendo el uso de algoritmos genéticos para optimizar la selección de portafolios. Además, se consideran los costos de transacción y las restricciones enteras en la optimización del portafolio. ...

European Option Pricing in Regime Switching Framework via Physics-Informed Residual Learning ArXiv ID: 2410.10474 “View on arXiv” Authors: Unknown Abstract In this article, we employ physics-informed residual learning (PIRL) and propose a pricing method for European options under a regime-switching framework, where closed-form solutions are not available. We demonstrate that the proposed approach serves an efficient alternative to competing pricing techniques for regime-switching models in the literature. Specifically, we demonstrate that PIRLs eliminate the need for retraining and become nearly instantaneous once trained, thus, offering an efficient and flexible tool for pricing options across a broad range of specifications and parameters. ...

Modeling News Interactions and Influence for Financial Market Prediction ArXiv ID: 2410.10614 “View on arXiv” Authors: Unknown Abstract The diffusion of financial news into market prices is a complex process, making it challenging to evaluate the connections between news events and market movements. This paper introduces FININ (Financial Interconnected News Influence Network), a novel market prediction model that captures not only the links between news and prices but also the interactions among news items themselves. FININ effectively integrates multi-modal information from both market data and news articles. We conduct extensive experiments on two datasets, encompassing the S&P 500 and NASDAQ 100 indices over a 15-year period and over 2.7 million news articles. The results demonstrate FININ’s effectiveness, outperforming advanced market prediction models with an improvement of 0.429 and 0.341 in the daily Sharpe ratio for the two markets respectively. Moreover, our results reveal insights into the financial news, including the delayed market pricing of news, the long memory effect of news, and the limitations of financial sentiment analysis in fully extracting predictive power from news data. ...

News-Driven Stock Price Forecasting in Indian Markets: A Comparative Study of Advanced Deep Learning Models ArXiv ID: 2411.05788 “View on arXiv” Authors: Unknown Abstract Forecasting stock market prices remains a complex challenge for traders, analysts, and engineers due to the multitude of factors that influence price movements. Recent advancements in artificial intelligence (AI) and natural language processing (NLP) have significantly enhanced stock price prediction capabilities. AI’s ability to process vast and intricate data sets has led to more sophisticated forecasts. However, achieving consistently high accuracy in stock price forecasting remains elusive. In this paper, we leverage 30 years of historical data from national banks in India, sourced from the National Stock Exchange, to forecast stock prices. Our approach utilizes state-of-the-art deep learning models, including multivariate multi-step Long Short-Term Memory (LSTM), Facebook Prophet with LightGBM optimized through Optuna, and Seasonal Auto-Regressive Integrated Moving Average (SARIMA). We further integrate sentiment analysis from tweets and reliable financial sources such as Business Standard and Reuters, acknowledging their crucial influence on stock price fluctuations. ...

Representation Learning for Regime detection in Block Hierarchical Financial Markets ArXiv ID: 2410.22346 “View on arXiv” Authors: Unknown Abstract We consider financial market regime detection from the perspective of deep representation learning of the causal information geometry underpinning traded asset systems using a hierarchical correlation structure to characterise market evolution. We assess the robustness of three toy models: SPDNet, SPD-NetBN and U-SPDNet whose architectures respect the underlying Riemannian manifold of input block hierarchical SPD correlation matrices. Market phase detection for each model is carried out using three data configurations: randomised JSE Top 60 data, synthetically-generated block hierarchical SPD matrices and block-resampled chronology-preserving JSE Top 60 data. We show that using a singular performance metric is misleading in our financial market investment use cases where deep learning models overfit in learning spatio-temporal correlation dynamics. ...

Sample Average Approximation for Portfolio Optimization under CVaR constraint in an (re)insurance context ArXiv ID: 2410.10239 “View on arXiv” Authors: Unknown Abstract We consider optimal allocation problems with Conditional Value-At-Risk (CVaR) constraint. We prove, under very mild assumptions, the convergence of the Sample Average Approximation method (SAA) applied to this problem, and we also exhibit a convergence rate and discuss the uniqueness of the solution. These results give (re)insurers a practical solution to portfolio optimization under market regulatory constraints, i.e. a certain level of risk. ...