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This research demonstrates that integrating Deep Reinforcement Learning with deterministic risk boundaries can effectively mitigate divergence risks in high-variance cryptocurrency pair trading. By combining a hierarchical selection methodology with a PPO agent, the study achieves statistically significant out-of-sample performance while maintaining strict risk management protocols. The findings offer a practical framework for quantitative traders seeking to apply hybrid statistical arbitrage and machine learning policies without compromising safety.
Dynamic Multi-Pair Trading Strategy in Cryptocurrency Markets with Deep Reinforcement Learning
arXiv:2606.04574v1 Announce Type: new Abstract: This study aims to determine whether the application of Deep Reinforcement Learning (DRL) as a specialized execution overlay can enhance pair trading in highly volatile cryptocurrency markets. Although classical implementations of the strategy have proven successful in traditional equities, they frequently exhibit rigidity and suffer from severe divergence risks when applied to high-variance environments. To address this need, this research introduces novel concepts. To construct a robust system, we developed a hierarchical "Filter-then-Rank" pair selection methodology and a proprietary "Fixed Risk, Adaptive Mean" execution model. The system employs a Proximal Policy Optimization (PPO) agent with a Long Short-Term Memory (LSTM) layer to govern execution decisions within strict deterministic risk management boundaries. Evaluated on 1-hour interval data from the Binance USD-M Futures market, the optimized RL policy achieved an out-of-sample performance that substantially outperformed the heuristic baseline. A stationary circular block bootstrap robustness check confirms that the agent's risk-adjusted outperformance is statistically significant at the 10 percent level. Although falling marginally short of the stricter 5 percent threshold, this result highlights the extreme idiosyncratic variance characteristic of digital assets. Ultimately, this thesis contributes to the quantitative finance literature by introducing a hybrid architecture that combines statistical arbitrage with DRL execution policies. Furthermore, it delivers a novel framework for safe reinforcement learning via deterministic shielding, proving that anchoring a neural policy to statistically robust boundaries successfully mitigates severe divergence risks.
Abstract:This study aims to determine whether the application of Deep Reinforcement Learning (DRL) as a specialized execution overlay can enhance pair trading in highly volatile cryptocurrency markets. Although classical implementations of the strategy have proven successful in traditional equities, they frequently exhibit rigidity and suffer from severe divergence risks when applied to high-variance environments. To address this need, this research introduces novel concepts. To construct a robust system, we developed a hierarchical "Filter-then-Rank" pair selection methodology and a proprietary "Fixed Risk, Adaptive Mean" execution model. The system employs a Proximal Policy Optimization (PPO) agent with a Long Short-Term Memory (LSTM) layer to govern execution decisions within strict deterministic risk management boundaries. Evaluated on 1-hour interval data from the Binance USD-M Futures market, the optimized RL policy achieved an out-of-sample performance that substantially outperformed the heuristic baseline. A stationary circular block bootstrap robustness check confirms that the agent's risk-adjusted outperformance is statistically significant at the 10 percent level. Although falling marginally short of the stricter 5 percent threshold, this result highlights the extreme idiosyncratic variance characteristic of digital assets. Ultimately, this thesis contributes to the quantitative finance literature by introducing a hybrid architecture that combines statistical arbitrage with DRL execution policies. Furthermore, it delivers a novel framework for safe reinforcement learning via deterministic shielding, proving that anchoring a neural policy to statistically robust boundaries successfully mitigates severe divergence risks.
Machine Learning (cs.LG); Neural and Evolutionary Computing (cs.NE); Statistical Finance (q-fin.ST); Trading and Market Microstructure (q-fin.TR); Machine Learning (stat.ML)
arXiv:2606.04574 [cs.LG]
(or arXiv:2606.04574v1 [cs.LG] for this version)
https://doi.org/10.48550/arXiv.2606.04574 arXiv-issued DOI via DataCite (pending registration)
From: Robert Ślepaczuk Ph.D. [view email] [v1] Wed, 3 Jun 2026 08:10:33 UTC (2,432 KB)
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