Deep neural network framework based on backward stochastic differential equations for pricing and hedging American options in high dimensions
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Publication:5014169
DOI10.1080/14697688.2020.1788219zbMATH Open1479.91393arXiv1909.11532OpenAlexW3083828368WikidataQ115295384 ScholiaQ115295384MaRDI QIDQ5014169FDOQ5014169
Authors: Yangang Chen, J. W. L. Wan 
Publication date: 1 December 2021
Published in: Quantitative Finance (Search for Journal in Brave)
Abstract: We propose a deep neural network framework for computing prices and deltas of American options in high dimensions. The architecture of the framework is a sequence of neural networks, where each network learns the difference of the price functions between adjacent timesteps. We introduce the least squares residual of the associated backward stochastic differential equation as the loss function. Our proposed framework yields prices and deltas on the entire spacetime, not only at a given point. The computational cost of the proposed approach is quadratic in dimension, which addresses the curse of dimensionality issue that state-of-the-art approaches suffer. Our numerical simulations demonstrate these contributions, and show that the proposed neural network framework outperforms state-of-the-art approaches in high dimensions.
Full work available at URL: https://arxiv.org/abs/1909.11532
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Derivative securities (option pricing, hedging, etc.) (91G20) Artificial neural networks and deep learning (68T07) Stopping times; optimal stopping problems; gambling theory (60G40) Applications of stochastic analysis (to PDEs, etc.) (60H30)
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Cited In (26)
- Deep ReLU network expression rates for option prices in high-dimensional, exponential Lévy models
- Perpetual cancellable American options with convertible features
- Lookback option pricing under the double Heston model using a deep learning algorithm
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- Overcoming the curse of dimensionality in the numerical approximation of parabolic partial differential equations with gradient-dependent nonlinearities
- A new deep neural network algorithm for multiple stopping with applications in options pricing
- Efficient pricing and hedging of high-dimensional American options using deep recurrent networks
- Solving American option optimal control problems in financial markets using a novel neural network
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- Robust deep hedging
- A neural network-based framework for financial model calibration
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- On a neural network to extract implied information from American options
- The deep parametric PDE method and applications to option pricing
- Option pricing in the Heston model with physics inspired neural networks
- Deep learning algorithms for solving high-dimensional nonlinear backward stochastic differential equations
- Overcoming the curse of dimensionality in the numerical approximation of high-dimensional semilinear elliptic partial differential equations
- Explainable neural network for pricing and universal static hedging of contingent claims
- Pricing American put option using RBF-NN: new simulation of Black-Scholes
- Approximations with deep neural networks in Sobolev time-space
- Deep xVA Solver: A Neural Network–Based Counterparty Credit Risk Management Framework
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- Solving high-dimensional optimal stopping problems using deep learning
- A deep learning method for pricing high-dimensional American-style options via state-space partition
- Pricing of high-dimensional American options by neural networks
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