A deep learning approach for computations of exposure profiles for high-dimensional Bermudan options

Andersson, Kristoffer; Oosterlee, Cornelis W.

doi:10.1016/j.amc.2021.126332

Cited by 10 publications

(7 citation statements)

References 24 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…(2021), Biagini et al. (2021) for parametric pricing results for European options, we refer to, for example, Andersson and Oosterlee (2021), Salvador et al. (2020), Becker et al.…”

Section: Numerical Examplesmentioning

confidence: 99%

Learning the random variables in Monte Carlo simulations with stochastic gradient descent: Machine learning for parametric PDEs and financial derivative pricing

Becker,

Jentzen,

Müller

et al. 2023

Mathematical Finance

View full text Add to dashboard Cite

In financial engineering, prices of financial products are computed approximately many times each trading day with (slightly) different parameters in each calculation. In many financial models such prices can be approximated by means of Monte Carlo (MC) simulations. To obtain a good approximation the MC sample size usually needs to be considerably large resulting in a long computing time to obtain a single approximation. A natural deep learning approach to reduce the computation time when new prices need to be calculated as quickly as possible would be to train an artificial neural network (ANN) to learn the function which maps parameters of the model and of the financial product to the price of the financial product. However, empirically it turns out that this approach leads to approximations with unacceptably high errors, in particular when the error is measured in the ‐norm, and it seems that ANNs are not capable to closely approximate prices of financial products in dependence on the model and product parameters in real life applications. This is not entirely surprising given the high‐dimensional nature of the problem and the fact that it has recently been proved for a large class of algorithms, including the deep learning approach outlined above, that such methods are in general not capable to overcome the curse of dimensionality for such approximation problems in the ‐norm. In this article we introduce a new numerical approximation strategy for parametric approximation problems including the parametric financial pricing problems described above and we illustrate by means of several numerical experiments that the introduced approximation strategy achieves a very high accuracy for a variety of high‐dimensional parametric approximation problems, even in the ‐norm. A central aspect of the approximation strategy proposed in this article is to combine MC algorithms with machine learning techniques to, roughly speaking, learn the random variables (LRV) in MC simulations. In other words, we employ stochastic gradient descent (SGD) optimization methods not to train parameters of standard ANNs but instead to learn random variables appearing in MC approximations. In that sense, the proposed LRV strategy has strong links to Quasi‐Monte Carlo (QMC) methods as well as to the field of algorithm learning. Our numerical simulations strongly indicate that the LRV strategy might indeed be capable to overcome the curse of dimensionality in the ‐norm in several cases where the standard deep learning approach has been proven not to be able to do so. This is not a contradiction to the established lower bounds mentioned above because this new LRV strategy is outside of the class of algorithms for which lower bounds have been established in the scientific literature. The proposed LRV strategy is of general nature and not only restricted to the parametric financial pricing problems described above, but applicable to a large class of approximation problems. In this article we numerically test the LRV strategy in the case of the pricing of European call options in the Black‐Scholes model with one underlying asset, in the case of the pricing of European worst‐of basket put options in the Black‐Scholes model with three underlying assets, in the case of the pricing of European average put options in the Black‐Scholes model with three underlying assets and knock‐in barriers, as well as in the case of stochastic Lorentz equations. For these examples the LRV strategy produces highly convincing numerical results when compared with standard MC simulations, QMC simulations using Sobol sequences, SGD‐trained shallow ANNs, and SGD‐trained deep ANNs.

show abstract

“…(2021), Biagini et al. (2021) for parametric pricing results for European options, we refer to, for example, Andersson and Oosterlee (2021), Salvador et al. (2020), Becker et al.…”

Section: Numerical Examplesmentioning

confidence: 99%

Learning the random variables in Monte Carlo simulations with stochastic gradient descent: Machine learning for parametric PDEs and financial derivative pricing

Becker,

Jentzen,

Müller

et al. 2023

Mathematical Finance

View full text Add to dashboard Cite

show abstract

“…In the case where p = 5, d = 1, and P = [90,110] × [0.01, 1] × [−0.1, 0.1] × [0.01, 0.5] × [90,110], where for all p = (ξ, T, r, σ, K) ∈ P, w ∈ R it holds that φ(p, w) = exp(−rT ) max exp [r − σ 2 2 ]T + T 1/2 σw ξ − K, 0 , where W is a standard normal random variable, and where Φ : R → R satisfies for all x ∈ R that N…”

Section: Approximative Pricing Of European Options In the Black-schol...mentioning

confidence: 99%

“…In the next step we introduce a parametric function on [0, 1] p with parameter set R M to reformulate the standard MC approximation in (2) in such a way that the random variables W 0,m : Ω → R, m ∈ {1, 2, . .…”

Section: Introductionmentioning

confidence: 99%

Learning the random variables in Monte Carlo simulations with stochastic gradient descent: Machine learning for parametric PDEs and financial derivative pricing

Becker¹,

Jentzen²,

Müller³

et al. 2022

Preprint

View full text Add to dashboard Cite

“…They propose an ANN-based method by directly learning the optimal stopping strategy of callable options, without depending on the approximation of continuation values. In the work of Andersson and Oosterlee (2021), the DOS algorithm is applied to compose exposure profiles for Bermudan contracts.…”

Section: Introductionmentioning

confidence: 99%

A Semi-Static Replication Method for Bermudan Swaptions under an Affine Multi-Factor Model

Hoencamp,

Jain,

Kandhai

2023

Risks

View full text Add to dashboard Cite

We present a semi-static replication algorithm for Bermudan swaptions under an affine, multi-factor term structure model. In contrast to dynamic replication, which needs to be continuously updated as the market moves, a semi-static replication needs to be rebalanced on just a finite number of instances. We show that the exotic derivative can be decomposed into a portfolio of vanilla discount bond options, which mirrors its value as the market moves and can be priced in closed form. This paves the way toward the efficient numerical simulation of xVA, market, and credit risk metrics for which forward valuation is the key ingredient. The static portfolio composition is obtained by regressing the target option’s value using an interpretable, artificial neural network. Leveraging the universal approximation power of neural networks, we prove that the replication error can be arbitrarily small for a sufficiently large portfolio. A direct, a lower bound, and an upper bound estimator for the Bermudan swaption price are inferred from the replication algorithm. Additionally, closed-form error margins to the price statistics are determined. We practically study the accuracy and convergence of the method through several numerical experiments. The results indicate that the semi-static replication approaches the LSM benchmark with basis point accuracy and provides tight, efficient error bounds. For in-model simulations, the semi-static replication outperforms a traditional dynamic hedge.

show abstract

A deep learning approach for computations of exposure profiles for high-dimensional Bermudan options

Cited by 10 publications

References 24 publications

Learning the random variables in Monte Carlo simulations with stochastic gradient descent: Machine learning for parametric PDEs and financial derivative pricing

Learning the random variables in Monte Carlo simulations with stochastic gradient descent: Machine learning for parametric PDEs and financial derivative pricing

Learning the random variables in Monte Carlo simulations with stochastic gradient descent: Machine learning for parametric PDEs and financial derivative pricing

A Semi-Static Replication Method for Bermudan Swaptions under an Affine Multi-Factor Model

Contact Info

Product

Resources

About