Bridging Econometrics and AI: VaR Estimation via Reinforcement Learning and GARCH Models
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Abstract (arXiv)
In an environment of increasingly volatile financial markets, the accurate estimation of risk remains a major challenge. Traditional econometric models, such as GARCH and its variants, are based on assumptions that are often too rigid to adapt to the complexity of the current market dynamics. To overcome these limitations, we propose a hybrid framework for Value-at-Risk (VaR) estimation, combining GARCH volatility models with deep reinforcement learning. Our approach incorporates directional market forecasting using the Double Deep Q-Network (DDQN) model, treating the task as an imbalanced classification problem. This architecture enables the dynamic adjustment of risk-level forecasts according to market conditions. Empirical validation on daily Eurostoxx 50 data covering periods of crisis and high volatility shows a significant improvement in the accuracy of VaR estimates, as well as a reduction in the number of breaches and also in capital requirements, while respecting regulatory risk thresholds. The ability of the model to adjust risk levels in real time reinforces its relevance to modern and proactive risk management.
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References · 14
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- 2013Playing Atari with Deep Reinforcement Learningcited by 3,211
- 2015Deep Reinforcement Learning with Double Q-learningcited by 1,704
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- 2016Deep Reinforcement Learning for Robotic Manipulation with Asynchronous Off-Policy Updatescited by 342
- 2019Reinforcement Learning in Healthcare: A Surveycited by 308
- 2016Temporal Convolutional Networks: A Unified Approach to Action Segmentationcited by 199
- 2020FinRL: A Deep Reinforcement Learning Library for Automated Stock Trading in Quantitative Financecited by 86
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- 2019Estimating Risk and Uncertainty in Deep Reinforcement Learningcited by 68
- 2022Towards Safe Reinforcement Learning via Constraining Conditional Value-at-Riskcited by 40
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- 2017Deep Reinforcement Learning for List-wise Recommendationscited by 35
- 2022Risk-Sensitive Reinforcement Learning with Exponential Criteriacited by 15
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