Optimal Asset Allocation using Adaptive Dynamic Programming

In recent years, the interest of investors has shifted to computerized asset allocation (portfolio management) to exploit the growing dynamics of the capital markets. In this paper, asset allocation is formalized as a Markovian Decision Problem which can be optimized by applying dynamic programming or reinforcement learning based algorithms. Using an artificial exchange rate, the asset allocation strategy optimized with reinforcement learning (Q-Learning) is shown to be equivalent to a policy computed by dynamic programming. The approach is then tested on the task to invest liquid capital in the German stock market. Here, neural networks are used as value function approximators. The resulting asset allocation strategy is superior to a heuristic benchmark policy. This is a further example which demonstrates the applicability of neural network based reinforcement learning to a problem setting with a high dimensional state space.