Equal risk pricing of derivatives with deep hedging

DOI10.1080/14697688.2020.1806343zbMATH Open1476.91177arXiv2002.08492OpenAlexW3084037690MaRDI QIDQ5014191FDOQ5014191

Alexandre Carbonneau, Frédéric Godin

Publication date: 1 December 2021

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: This article presents a deep reinforcement learning approach to price and hedge financial derivatives. This approach extends the work of Guo and Zhu (2017) who recently introduced the equal risk pricing framework, where the price of a contingent claim is determined by equating the optimally hedged residual risk exposure associated respectively with the long and short positions in the derivative. Modifications to the latter scheme are considered to circumvent theoretical pitfalls associated with the original approach. Derivative prices obtained through this modified approach are shown to be arbitrage-free. The current paper also presents a general and tractable implementation for the equal risk pricing framework inspired by the deep hedging algorithm of Buehler et al. (2019). An $epsilon$-completeness measure allowing for the quantification of the residual hedging risk associated with a derivative is also proposed. The latter measure generalizes the one presented in Bertsimas et al. (2001) based on the quadratic penalty. Monte Carlo simulations are performed under a large variety of market dynamics to demonstrate the practicability of our approach, to perform benchmarking with respect to traditional methods and to conduct sensitivity analyses.

Full work available at URL: https://arxiv.org/abs/2002.08492

zbMATH Keywords

deep learningoption pricinghedgingreinforcement learningconvex risk measures

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Artificial neural networks and deep learning (68T07) Statistical methods; risk measures (91G70)

Cites Work

• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• Title not available (Why is that?)
• The pricing of options and corporate liabilities
• Learning representations by back-propagating errors
• A general version of the fundamental theorem of asset pricing
• Option pricing when underlying stock returns are discontinuous
• Convex measures of risk and trading constraints
• Dynamic Programming and Pricing of Contingent Claims in an Incomplete Market
• Martingales and stochastic integrals in the theory of continuous trading
• On the rate of convergence of discrete-time contingent claims.
• THE GARCH OPTION PRICING MODEL
• Hedging Derivative Securities and Incomplete Markets: An ε-Arbitrage Approach
• A Regime-Switching Model of Long-Term Stock Returns
• Variance-Optimal Hedging in Discrete Time
• A Discrete Time Equivalent Martingale Measure
• On the range of options prices
• Option pricing under regime-switching models: novel approaches removing path-dependence
• Risk measure pricing and hedging in incomplete markets
• Equal risk pricing under convex trading constraints
• Minimizing CVaR in global dynamic hedging with transaction costs
• Monte Carlo Methods for Value-at-Risk and Conditional Value-at-Risk
• Optimal hedging when the underlying asset follows a regime-switching Markov process
• Deep hedging

Cited In (15)

• INSURANCE VALUATION: A TWO-STEP GENERALISED REGRESSION APPROACH
• Recent advances in reinforcement learning in finance
• Risk-neutral valuation: Pricing and hedging of financial derivatives
• Equal risk pricing and hedging of financial derivatives with convex risk measures
• VALUATION OF GENERAL CONTINGENT CLAIMS WITH SHORT SELLING BANS: AN EQUAL-RISK PRICING APPROACH
• Deep learning for enhanced index tracking
• Robust deep hedging
• A data-driven deep learning approach for options market making
• Deep hedging of long-term financial derivatives
• Designing universal causal deep learning models: The geometric (Hyper)transformer
• ONE FOR ALL The Potential Approach to Pricing and Hedging
• Optimal liquidation through a limit order book: a neural network and simulation approach
• On equi-derivatives
• Deep hedging
• Deep reinforcement learning for option pricing and hedging under dynamic expectile risk measures

Uses Software

• Adam

This page was built for publication: Equal risk pricing of derivatives with deep hedging

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5014191)