Variance-Optimal Arm Selection: Misallocation Minimization and Best Arm Identification

Sabrina Khurshid; Gourab Ghatak; Mohammad Shahid Abdulla

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arXiv · 2505.11985

Variance-Optimal Arm Selection: Misallocation Minimization and Best Arm Identification

Sabrina Khurshid·Gourab Ghatak·Mohammad Shahid Abdulla

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Abstract

This paper focuses on selecting the arm with the highest variance from a set of $K$ independent arms. Specifically, we focus on two settings: (i) misallocation minimization setting, that penalizes the number of pulls of suboptimal arms in terms of variance, and (ii) fixed-budget best arm identification setting, that evaluates the ability of an algorithm to determine the arm with the highest variance after a fixed number of pulls. We develop a novel online algorithm called UCB-VV for the misallocation minimization (MM) and show that its upper bound on misallocation for bounded rewards evolves as $\mathcal{O}\left(\log{n}\right)$ where $n$ is the horizon. By deriving the lower bound on the misallocation, we show that UCB-VV is order optimal. For the fixed budget best arm identification (BAI) setting we propose the SHVV algorithm. We show that the upper bound of the error probability of SHVV evolves as $\exp\left(-\frac{n}{\log(K) H}\right)$, where $H$ represents the complexity of the problem, and this rate matches the corresponding lower bound. We extend the framework from bounded distributions to sub-Gaussian distributions using a novel concentration inequality on the sample variance and standard deviation. Leveraging the same, we derive a concentration inequality for the empirical Sharpe ratio (SR) for sub-Gaussian distributions, which was previously unknown in the literature. Empirical simulations show that UCB-VV consistently outperforms $ε$-greedy across different sub-optimality gaps though it is surpassed by VTS, which exhibits the lowest misallocation, albeit lacking in theoretical guarantees. We also illustrate the superior performance of SHVV, for a fixed budget setting under 6 different setups against uniform sampling. Finally, we conduct a case study to empirically evaluate the performance of the UCB-VV and SHVV in call option trading on $100$ stocks generated using GBM.

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BibTeX RIS

Sabrina Khurshid, Gourab Ghatak, Mohammad Shahid Abdulla. 2026-02-17. Variance-Optimal Arm Selection: Misallocation Minimization and Best Arm Identification. https://arxiv.org/abs/2505.11985

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