CNNs

A Deep Learning Approach for Trading Factor Residuals ArXiv ID: 2412.11432 “View on arXiv” Authors: Unknown Abstract The residuals in factor models prevalent in asset pricing presents opportunities to exploit the mis-pricing from unexplained cross-sectional variation for arbitrage. We performed a replication of the methodology of Guijarro-Ordonez et al. (2019) (G-P-Z) on Deep Learning Statistical Arbitrage (DLSA), originally applied to U.S. equity data from 1998 to 2016, using a more recent out-of-sample period from 2016 to 2024. Adhering strictly to point-in-time (PIT) principles and ensuring no information leakage, we follow the same data pre-processing, factor modeling, and deep learning architectures (CNNs and Transformers) as outlined by G-P-Z. Our replication yields unusually strong performance metrics in certain tests, with out-of-sample Sharpe ratios occasionally exceeding 10. While such results are intriguing, they may indicate model overfitting, highly specific market conditions, or insufficient accounting for transaction costs and market impact. Further examination and robustness checks are needed to align these findings with the more modest improvements reported in the original study. (This work was conducted as the final project for IEOR 4576: Data-Driven Methods in Finance at Columbia University.) ...

Deep Policy Gradient Methods in Commodity Markets ArXiv ID: 2308.01910 “View on arXiv” Authors: Unknown Abstract The energy transition has increased the reliance on intermittent energy sources, destabilizing energy markets and causing unprecedented volatility, culminating in the global energy crisis of 2021. In addition to harming producers and consumers, volatile energy markets may jeopardize vital decarbonization efforts. Traders play an important role in stabilizing markets by providing liquidity and reducing volatility. Several mathematical and statistical models have been proposed for forecasting future returns. However, developing such models is non-trivial due to financial markets’ low signal-to-noise ratios and nonstationary dynamics. This thesis investigates the effectiveness of deep reinforcement learning methods in commodities trading. It formalizes the commodities trading problem as a continuing discrete-time stochastic dynamical system. This system employs a novel time-discretization scheme that is reactive and adaptive to market volatility, providing better statistical properties for the sub-sampled financial time series. Two policy gradient algorithms, an actor-based and an actor-critic-based, are proposed for optimizing a transaction-cost- and risk-sensitive trading agent. The agent maps historical price observations to market positions through parametric function approximators utilizing deep neural network architectures, specifically CNNs and LSTMs. On average, the deep reinforcement learning models produce an 83 percent higher Sharpe ratio than the buy-and-hold baseline when backtested on front-month natural gas futures from 2017 to 2022. The backtests demonstrate that the risk tolerance of the deep reinforcement learning agents can be adjusted using a risk-sensitivity term. The actor-based policy gradient algorithm performs significantly better than the actor-critic-based algorithm, and the CNN-based models perform slightly better than those based on the LSTM. ...