Solving dynamic portfolio selection problems via score-based diffusion models

Ahmad Aghapour, Erhan Bayraktar, Fengyi Yuan

Keywords: dynamic programming: optimal control; finance: portfolio; computer science: artificial intelligence.

Abstract: In this work, we tackle the dynamic mean-variance portfolio selection problem in a model-free manner, based on (generative) diffusion models. We propose using data sampled from the real model $\mathbb P$ (which is unknown) with limited size to train a generative model $\mathbb Q$ (from which we can easily and adequately sample). With adaptive training and sampling methods that are tailor-made for time-series data, we obtain quantification bounds between $\mathbb P$ and $\mathbb Q$ in terms of the adapted Wasserstein metric $\mathcal A\mathcal W_2$. We then propose a policy gradient algorithm based on the generative environment, in which our innovative adapted sampling method provides approximate scenario generators. We illustrate the performance of our algorithm on real data. The algorithm based on the generative environment produces portfolios that beat several important baselines, including the Markowitz portfolio, the equal weight (naive) portfolio, and S\&P 500.

Submission Number: 54