This article discusses a new application of reinforcement learning: to the problem of hedging a portfolio of “over-the-counter” derivatives under under market frictions such as trading costs and liquidity constraints. It is an extended version of our...
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This article discusses a new application of reinforcement learning: to the problem of hedging a portfolio of “over-the-counter” derivatives under under market frictions such as trading costs and liquidity constraints. It is an extended version of our recent work "https://www.ssrn.com/abstract=3120710" www.ssrn.com/abstract=3120710, here using notation more common in the machine learning literature.The objective is to maximize a non-linear risk-adjusted return function by trading in liquid hedging instruments such as equities or listed options. The approach presented here is the first efficient and model-independent algorithm which can be used for such problems at scale