Performance Evaluation of Equal-Weight Portfolio and Optimum Risk Portfolio on Indian Stocks ArXiv ID: 2309.13696 “View on arXiv” Authors: Unknown Abstract Designing an optimum portfolio for allocating suitable weights to its constituent assets so that the return and risk associated with the portfolio are optimized is a computationally hard problem. The seminal work of Markowitz that attempted to solve the problem by estimating the future returns of the stocks is found to perform sub-optimally on real-world stock market data. This is because the estimation task becomes extremely challenging due to the stochastic and volatile nature of stock prices. This work illustrates three approaches to portfolio design minimizing the risk, optimizing the risk, and assigning equal weights to the stocks of a portfolio. Thirteen critical sectors listed on the National Stock Exchange (NSE) of India are first chosen. Three portfolios are designed following the above approaches choosing the top ten stocks from each sector based on their free-float market capitalization. The portfolios are designed using the historical prices of the stocks from Jan 1, 2017, to Dec 31, 2022. The portfolios are evaluated on the stock price data from Jan 1, 2022, to Dec 31, 2022. The performances of the portfolios are compared, and the portfolio yielding the higher return for each sector is identified. ...

Topology-Agnostic Detection of Temporal Money Laundering Flows in Billion-Scale Transactions ArXiv ID: 2309.13662 “View on arXiv” Authors: Unknown Abstract Money launderers exploit the weaknesses in detection systems by purposefully placing their ill-gotten money into multiple accounts, at different banks. That money is then layered and moved around among mule accounts to obscure the origin and the flow of transactions. Consequently, the money is integrated into the financial system without raising suspicion. Path finding algorithms that aim at tracking suspicious flows of money usually struggle with scale and complexity. Existing community detection techniques also fail to properly capture the time-dependent relationships. This is particularly evident when performing analytics over massive transaction graphs. We propose a framework (called FaSTMAN), adapted for domain-specific constraints, to efficiently construct a temporal graph of sequential transactions. The framework includes a weighting method, using 2nd order graph representation, to quantify the significance of the edges. This method enables us to distribute complex queries on smaller and densely connected networks of flows. Finally, based on those queries, we can effectively identify networks of suspicious flows. We extensively evaluate the scalability and the effectiveness of our framework against two state-of-the-art solutions for detecting suspicious flows of transactions. For a dataset of over 1 Billion transactions from multiple large European banks, the results show a clear superiority of our framework both in efficiency and usefulness. ...

Can I Trust the Explanations? Investigating Explainable Machine Learning Methods for Monotonic Models ArXiv ID: 2309.13246 “View on arXiv” Authors: Unknown Abstract In recent years, explainable machine learning methods have been very successful. Despite their success, most explainable machine learning methods are applied to black-box models without any domain knowledge. By incorporating domain knowledge, science-informed machine learning models have demonstrated better generalization and interpretation. But do we obtain consistent scientific explanations if we apply explainable machine learning methods to science-informed machine learning models? This question is addressed in the context of monotonic models that exhibit three different types of monotonicity. To demonstrate monotonicity, we propose three axioms. Accordingly, this study shows that when only individual monotonicity is involved, the baseline Shapley value provides good explanations; however, when strong pairwise monotonicity is involved, the Integrated gradients method provides reasonable explanations on average. ...

Automated Market Makers in Cryptoeconomic Systems: A Taxonomy and Archetypes ArXiv ID: 2309.12818 “View on arXiv” Authors: Unknown Abstract Designing automated market makers (AMMs) is crucial for decentralized token exchanges in cryptoeconomic systems. At the intersection of software engineering and economics, AMM design is complex and, if done incorrectly, can lead to financial risks and inefficiencies. We developed an AMM taxonomy for systematically comparing AMM designs and propose three AMM archetypes that meet key requirements for token issuance and exchange. This work bridges software engineering and economic perspectives, providing insights to help developers design AMMs tailored to diverse use cases and foster sustainable cryptoeconomic systems. ...

EarnHFT: Efficient Hierarchical Reinforcement Learning for High Frequency Trading ArXiv ID: 2309.12891 “View on arXiv” Authors: Unknown Abstract High-frequency trading (HFT) uses computer algorithms to make trading decisions in short time scales (e.g., second-level), which is widely used in the Cryptocurrency (Crypto) market (e.g., Bitcoin). Reinforcement learning (RL) in financial research has shown stellar performance on many quantitative trading tasks. However, most methods focus on low-frequency trading, e.g., day-level, which cannot be directly applied to HFT because of two challenges. First, RL for HFT involves dealing with extremely long trajectories (e.g., 2.4 million steps per month), which is hard to optimize and evaluate. Second, the dramatic price fluctuations and market trend changes of Crypto make existing algorithms fail to maintain satisfactory performance. To tackle these challenges, we propose an Efficient hieArchical Reinforcement learNing method for High Frequency Trading (EarnHFT), a novel three-stage hierarchical RL framework for HFT. In stage I, we compute a Q-teacher, i.e., the optimal action value based on dynamic programming, for enhancing the performance and training efficiency of second-level RL agents. In stage II, we construct a pool of diverse RL agents for different market trends, distinguished by return rates, where hundreds of RL agents are trained with different preferences of return rates and only a tiny fraction of them will be selected into the pool based on their profitability. In stage III, we train a minute-level router which dynamically picks a second-level agent from the pool to achieve stable performance across different markets. Through extensive experiments in various market trends on Crypto markets in a high-fidelity simulation trading environment, we demonstrate that EarnHFT significantly outperforms 6 state-of-art baselines in 6 popular financial criteria, exceeding the runner-up by 30% in profitability. ...

Econometric Model Using Arbitrage Pricing Theory and Quantile Regression to Estimate the Risk Factors Driving Crude Oil Returns ArXiv ID: 2309.13096 “View on arXiv” Authors: Unknown Abstract This work adopts a novel approach to determine the risk and return of crude oil stocks by employing Arbitrage Pricing Theory (APT) and Quantile Regression (QR).The APT identifies the underlying risk factors likely to impact crude oil returns.Subsequently, QR estimates the relationship between the factors and the returns across different quantiles of the distribution. The West Texas Intermediate (WTI) crude oil price is used in this study as a benchmark for crude oil prices. WTI price fluctuations can have a significant impact on the performance of crude oil stocks and, subsequently, the global economy.To determine the proposed models stability, various statistical measures are used in this study.The results show that changes in WTI returns can have varying effects depending on market conditions and levels of volatility. The study highlights the impact of structural discontinuities on returns, which can be caused by changes in the global economy and the demand for crude oil.The inclusion of pandemic, geopolitical, and inflation-related explanatory variables add uniqueness to this study as it considers current global events that can affect crude oil returns.Findings show that the key factors that pose major risks to returns are industrial production, inflation, the global price of energy, the shape of the yield curve, and global economic policy uncertainty.This implies that while making investing decisions in WTI futures, investors should pay particular attention to these elements ...

Predictive AI for SME and Large Enterprise Financial Performance Management ArXiv ID: 2311.05840 “View on arXiv” Authors: Unknown Abstract Financial performance management is at the core of business management and has historically relied on financial ratio analysis using Balance Sheet and Income Statement data to assess company performance as compared with competitors. Little progress has been made in predicting how a company will perform or in assessing the risks (probabilities) of financial underperformance. In this study I introduce a new set of financial and macroeconomic ratios that supplement standard ratios of Balance Sheet and Income Statement. I also provide a set of supervised learning models (ML Regressors and Neural Networks) and Bayesian models to predict company performance. I conclude that the new proposed variables improve model accuracy when used in tandem with standard industry ratios. I also conclude that Feedforward Neural Networks (FNN) are simpler to implement and perform best across 6 predictive tasks (ROA, ROE, Net Margin, Op Margin, Cash Ratio and Op Cash Generation); although Bayesian Networks (BN) can outperform FNN under very specific conditions. BNs have the additional benefit of providing a probability density function in addition to the predicted (expected) value. The study findings have significant potential helping CFOs and CEOs assess risks of financial underperformance to steer companies in more profitable directions; supporting lenders in better assessing the condition of a company and providing investors with tools to dissect financial statements of public companies more accurately. ...

A Comprehensive Review on Financial Explainable AI ArXiv ID: 2309.11960 “View on arXiv” Authors: Unknown Abstract The success of artificial intelligence (AI), and deep learning models in particular, has led to their widespread adoption across various industries due to their ability to process huge amounts of data and learn complex patterns. However, due to their lack of explainability, there are significant concerns regarding their use in critical sectors, such as finance and healthcare, where decision-making transparency is of paramount importance. In this paper, we provide a comparative survey of methods that aim to improve the explainability of deep learning models within the context of finance. We categorize the collection of explainable AI methods according to their corresponding characteristics, and we review the concerns and challenges of adopting explainable AI methods, together with future directions we deemed appropriate and important. ...

Estimating Stable Fixed Points and Langevin Potentials for Financial Dynamics ArXiv ID: 2309.12082 “View on arXiv” Authors: Unknown Abstract The Geometric Brownian Motion (GBM) is a standard model in quantitative finance, but the potential function of its stochastic differential equation (SDE) cannot include stable nonzero prices. This article generalises the GBM to an SDE with polynomial drift of order q and shows via model selection that q=2 is most frequently the optimal model to describe the data. Moreover, Markov chain Monte Carlo ensembles of the accompanying potential functions show a clear and pronounced potential well, indicating the existence of a stable price. ...

Stock Market Sentiment Classification and Backtesting via Fine-tuned BERT ArXiv ID: 2309.11979 “View on arXiv” Authors: Unknown Abstract With the rapid development of big data and computing devices, low-latency automatic trading platforms based on real-time information acquisition have become the main components of the stock trading market, so the topic of quantitative trading has received widespread attention. And for non-strongly efficient trading markets, human emotions and expectations always dominate market trends and trading decisions. Therefore, this paper starts from the theory of emotion, taking East Money as an example, crawling user comment titles data from its corresponding stock bar and performing data cleaning. Subsequently, a natural language processing model BERT was constructed, and the BERT model was fine-tuned using existing annotated data sets. The experimental results show that the fine-tuned model has different degrees of performance improvement compared to the original model and the baseline model. Subsequently, based on the above model, the user comment data crawled is labeled with emotional polarity, and the obtained label information is combined with the Alpha191 model to participate in regression, and significant regression results are obtained. Subsequently, the regression model is used to predict the average price change for the next five days, and use it as a signal to guide automatic trading. The experimental results show that the incorporation of emotional factors increased the return rate by 73.8% compared to the baseline during the trading period, and by 32.41% compared to the original alpha191 model. Finally, we discuss the advantages and disadvantages of incorporating emotional factors into quantitative trading, and give possible directions for further research in the future. ...