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

DOI10.1080/14697688.2023.2181206zbMATH Open1518.91282arXiv2208.14038MaRDI QIDQ6158425FDOQ6158425

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

Publication date: 20 June 2023

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

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.

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

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zbMATH Keywords

deep learningMonte Carlooption pricingvolatility surfacevariational autoencoders

Mathematics Subject Classification ID

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

Cites Work

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

Cited In (1)

• Arbitrage-Free Implied Volatility Surface Generation with Variational Autoencoders

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