PAGAN: Portfolio Analysis with Generative Adversarial Networks

TL;DR

This paper introduces PAGAN, a deep generative model for financial market analysis that captures market uncertainty and aids in portfolio optimization through Monte Carlo simulations, outperforming traditional methods.

Contribution

PAGAN is the first deep generative approach modeling joint price trend distributions for portfolio analysis, addressing market unpredictability more effectively than classical models.

Findings

Promising results on real-world datasets across various portfolios.

Effective modeling of market uncertainty improves portfolio risk-return trade-offs.

Monte Carlo simulations facilitate robust portfolio optimization.

Abstract

Since decades, the data science community tries to propose prediction models of financial time series. Yet, driven by the rapid development of information technology and machine intelligence, the velocity of today's information leads to high market efficiency. Sound financial theories demonstrate that in an efficient marketplace all information available today, including expectations on future events, are represented in today prices whereas future price trend is driven by the uncertainty. This jeopardizes the efforts put in designing prediction models. To deal with the unpredictability of financial systems, today's portfolio management is largely based on the Markowitz framework which puts more emphasis in the analysis of the market uncertainty and less in the price prediction. The limitation of the Markowitz framework stands in taking very strong ideal assumptions about future returns probability distribution. To address this situation we propose PAGAN, a pioneering methodology based on deep generative models. The goal is modeling the market uncertainty that ultimately is the main factor driving future trends. The generative model learns the joint probability distribution of price trends for a set of financial assets to match the probability distribution of the real market. Once the model is trained, a portfolio is optimized by deciding the best diversification to minimize the risk and maximize the expected returns observed over the execution of several simulations. Applying the model for analyzing possible futures, is as simple as executing a Monte Carlo simulation, a technique very familiar to finance experts. The experimental results on different portfolios representing different geopolitical areas and industrial segments constructed using real-world public data sets demonstrate promising results.