Deep weighted Monte Carlo: a hybrid option pricing framework using neural networks

DOI10.1080/14697688.2023.2181206MaRDI QIDQ6158425zbMATH OpenFDO

Authors Gábor Fáth, I. Csabai, Gábor Molnár-Sáska

Publication date 20 June 2023

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2208.14038

zbMATH Keywords

deep learningMonte Carlooption pricingvariational autoencodersvolatility surface

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Artificial neural networks and deep learning (68T07) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: Recent studies have demonstrated the efficiency of Variational Autoencoders (VAE) to compress high-dimensional implied volatility surfaces into a low dimensional representation. Although this method can be effectively used for pricing vanilla options, it does not provide any explicit information about the dynamics of the underlying asset. In our work we present an effective way to overcome this problem. We use a Weighted Monte Carlo approach to first generate paths from a simple a priori Brownian dynamics, and then calculate path weights to price options correctly. We develop and successfully train a neural network that is able to assign these weights directly from the latent space. Combining the encoder network of the VAE and this new "weight assigner" module, we are able to build a dynamic pricing framework which cleanses the volatility surface from irrelevant noise fluctuations, and then can price not just vanillas, but also exotic options on this idealized vol surface. This pricing method can provide relative value signals for option traders.

Recommendations

• Deep learning volatility: a deep neural network perspective on pricing and calibration in (rough) volatility models
• Automatic control variates for option pricing using neural networks
• The deep parametric PDE method and applications to option pricing
• A neural network approach to understanding implied volatility movements
• Artificial neural network for option pricing with and without asymptotic correction

Cites work

• A closed-form solution for options with stochastic volatility with applications to bond and currency options
• An Interior Trust Region Approach for Nonlinear Minimization Subject to Bounds
• Deep UQ: learning deep neural network surrogate models for high dimensional uncertainty quantification
• Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models
• The pricing of options and corporate liabilities
• WEIGHTED MONTE CARLO: A NEW TECHNIQUE FOR CALIBRATING ASSET-PRICING MODELS

Cited in

(1)

• Arbitrage-Free Implied Volatility Surface Generation with Variational Autoencoders

This page was built for publication: Deep weighted Monte Carlo: a hybrid option pricing framework using neural networks

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q6158425)