Applications of Markov Decision Process Model and Deep Learning in Quantitative Portfolio Management during the COVID-19 Pandemic

Abstract

Whether for institutional investors or individual investors, there is an urgent need to explore autonomous models that can adapt to the non-stationary, low-signal-to-noise markets. This research aims to explore the two unique challenges in quantitative portfolio management: (1) the difficulty of representation and (2) the complexity of environments. In this research, we suggest a Markov decision process model-based deep reinforcement learning model including deep learning methods to perform strategy optimization, called SwanTrader. To achieve better decisions of the portfolio-management process from two different perspectives, i.e., the temporal patterns analysis and robustness information capture based on market observations, we suggest an optimal deep learning network in our model that incorporates a stacked sparse denoising autoencoder (SSDAE) and a long–short-term-memory-based autoencoder (LSTM-AE). The findings in times of COVID-19 show that the suggested model using two deep learning models gives better results with an alluring performance profile in comparison with four standard machine learning models and two state-of-the-art reinforcement learning models in terms of Sharpe ratio, Calmar ratio, and beta and alpha values. Furthermore, we analyzed which deep learning models and reward functions were most effective in optimizing the agent’s management decisions. The results of our suggested model for investors can assist in reducing the risk of investment loss as well as help them to make sound decisions.