Multi-Objective Bayesian Optimization of Deep Reinforcement Learning for Environmental, Social, and Governance (ESG) Financial Portfolio Management

TL;DR

This paper introduces a multi-objective Bayesian optimization approach to tune deep reinforcement learning agents for financial portfolio management, balancing risk-adjusted returns and ESG scores, and demonstrating superior trade-offs over random search.

Contribution

It presents a novel multi-objective Bayesian optimization framework for hyperparameter tuning of DRL agents in ESG-focused financial portfolio management, emphasizing Pareto efficiency.

Findings

Pareto sets outperform random search in hypervolume metrics.

The method effectively balances Sharpe ratio and ESG scores.

Experiments conducted on DJIA and NASDAQ markets show improved trade-offs.

Abstract

DRL agents circumvent the issue of classic models in the sense that they do not make assumptions like the financial returns being normally distributed and are able to deal with any information like the ESG score if they are configured to gain a reward that makes an objective better. However, the performance of DRL agents has high variability and it is very sensible to the value of their hyperparameters. Bayesian optimization is a class of methods that are suited to the optimization of black-box functions, that is, functions whose analytical expression is unknown, are noisy and expensive to evaluate. The hyperparameter tuning problem of DRL algorithms perfectly suits this scenario. As training an agent just for one objective is a very expensive period, requiring millions of timesteps, instead of optimizing an objective being a mixture of a risk-performance metric and an ESG metric, we choose to separate the objective and solve the multi-objective scenario to obtain an optimal Pareto set of portfolios representing the best tradeoff between the Sharpe ratio and the ESG mean score of the portfolio and leaving to the investor the choice of the final portfolio. We conducted our experiments using environments encoded within the OpenAI Gym, adapted from the FinRL platform. The experiments are carried out in the Dow Jones Industrial Average (DJIA) and the NASDAQ markets in terms of the Sharpe ratio achieved by the agent and the mean ESG score of the portfolio. We compare the performance of the obtained Pareto sets in hypervolume terms illustrating how portfolios are the best trade-off between the Sharpe ratio and mean ESG score. Also, we show the usefulness of our proposed methodology by comparing the obtained hypervolume with one achieved by a Random Search methodology on the DRL hyperparameter space.