Automated asset management based on partially cooperative agents for a world of risks

Paulo André Lima de Castro, Jaime Simão Sichman
2012 Applied intelligence (Boston)  
Despite the fact any investor prefers lower risk and higher return, investors may have different preferences about what would be an acceptable risk or a minimal return. For instance, some investors prefer to have a lower bound risk rather than gaining a higher return. In portfolio theory, it is commonly assumed the existence of one risk free asset that offers a positive return. This theoretical risk free asset combined with a risky portfolio creates a new portfolio that presents a linear
more » ... n between risk and return as the risk free asset weight (w f ) changes. Hence, any level of risk or of return is easy to achieve separately, just by changing w f . However, in a world without any risk free assets, the combination between assets creates nonlinear portfolios. Achieving a specific level of risk or return is not a trivial task. In this paper, we assume a risky world rather than the existence of a risk free asset, in order to model an automated asset management system. Furthermore, some automated asset managers give very different results when evolving in different contexts: hence, a very profitable manager can have very bad results in other market situations. This paper presents a multiagent architecture, aiming to tackle these problems. The architecture, named COAST (COmpetitive Agent SocieTy), is based on competitive agents that act autonomously on behalf of an investor in financial asset management. It allows the simultaneous and competitive use of several asset analysis techniques currently applied in the finance field. Some dedicated agents, called advisors, apply a particular technique to a single asset. The results provided by these advisors are then submitted to and analyzed by a special agent called coach, who evaluates its advisors' performance and defines an expectation about the future price of one specific asset. Within COAST, several coaches negotiate to define the best money allocation among different assets, by using a negotiation protocol defined in this paper. We also propose an investor description model that is able to represent different investors' preferences with defined acceptable limits of risk and/or return. The COAST architecture was designed to operate adequately with any possible investor's preference. It was implemented using a financial market simulator called AgEx and tested using real data from the Nasdaq stock exchange. The test results show that the architecture performed well when compared to an adjusted market index.
doi:10.1007/s10489-012-0366-8 fatcat:ixj63fyxdvfz5f7wyy2p4iwu3q