
Machine Learning for Finance
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Following the long history of modern deep learning being a continuation of quantitative finance with more GPUs, the theoretical foundation of reinforcement learning lies in Markov models.
Note: This section requires a bit of mathematical background knowledge. If you are struggling, there is a beautiful visual introduction by Victor Powell here: http://setosa.io/ev/markov-chains/.
A more formal, but still simple, introduction is available on the website Analytics Vidhya: https://www.analyticsvidhya.com/blog/2014/07/markov-chain-simplified/.
A Markov model describes a stochastic process with different states in which the probability of ending up in a specific state is purely dependent on the state one is currently in. In the following diagram, you can see a simple Markov model describing recommendations given for a stock:
The Markov model
As you can see, there are three states in this model, BUY, HOLD, and SELL. For...