Liquid Instruments-Based Replication of Financial Indices
The project explored reinforcement learning (RL) for financial index replication, developing a prototype that tracks private equity indices using liquid instruments. Key innovations include a dual-objective reward framework, algorithm validation, demonstrating RL’s potential for dynamic, cost-efficient index replication.
Result
The project successfully developed a reinforcement learning (RL)-based prototype for financial index replication, demonstrating the ability to track stock and private equity indices using liquid instruments. Key achievements include:
Dual-Objective Reward Framework: Balanced index tracking with minimal tracking error.
Algorithm Selection & Validation: Tested and optimized deep RL models for performance.
Docker-Based Prototype: Ensured reproducibility and scalability for further research.
Application to Private Equity Indices: Explored RL’s feasibility for illiquid asset replication.
The results confirm RL’s potential for dynamic index replication, with future improvements focused on real-time data integration, parameter tuning, and broader market applications.
Description
The project explored the use of Reinforcement Learning (RL) to replicate financial indices while minimizing tracking error. A prototype was developed, applying deep RL algorithms to track stock and private equity indices using liquid instruments such as futures on equities, fixed income, FX, and commodities.
Key achievements include a dual-objective reward framework, a Docker-based testing environment, and successful backtests demonstrating feasibility. The results highlight RL’s potential for index replication, paving the way for further refinement, parameter tuning, and real-world implementation.
Key Data
Projectlead
Project partners
QuantArea AG
Project status
completed, 06/2024 - 12/2024
Funding partner
Innosuisse Innovationsscheck
Project budget
15'000 CHF