Hedging Option Books Using Neural-SDE Market Models

DOI10.1080/1350486X.2023.2221448MaRDI QIDQ6112769zbMATH OpenOpenAlexFDO

Authors Samuel N. Cohen, C. Reisinger, Sheng Wang

Publication date 7 August 2023

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2205.15991

zbMATH Keywords

European optionshedgingmarket modelsmarket simulatorsneural-SDEno-arbitrage

Mathematics Subject Classification ID

Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We study the capability of arbitrage-free neural-SDE market models to yield effective strategies for hedging options. In particular, we derive sensitivity-based and minimum-variance-based hedging strategies using these models and examine their performance when applied to various option portfolios using real-world data. Through backtesting analysis over typical and stressed market periods, we show that neural-SDE market models achieve lower hedging errors than Black--Scholes delta and delta-vega hedging consistently over time, and are less sensitive to the tenor choice of hedging instruments. In addition, hedging using market models leads to similar performance to hedging using Heston models, while the former tends to be more robust during stressed market periods.

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Cited in

(8)

• Option valuation under no-arbitrage constraints with neural networks
• Krighedge: Gaussian process surrogates for delta hedging
• Data-driven hedging of stock index options via deep learning
• Arbitrage-Free Implied Volatility Surface Generation with Variational Autoencoders
• Arbitrage-Free Neural-SDE Market Models
• Empirical deep hedging
• Robust Risk-Aware Option Hedging
• Neural stochastic Volterra equations: learning path-dependent dynamics

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