Forums  > Books & Papers  > Gated Neural Networks for Option Pricing: Rationality by Design  
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Total Posts: 34
Joined: Nov 2013
Posted: 2016-12-12 05:29 )

Abstract: "We propose a neural network approach to price EU call options that significantly outperforms some existing pricing models and comes with guarantees that its predictions are economically reasonable. To achieve this, we introduce a class of gated neural networks that automatically learn to divide-and-conquer the problem space for robust and accurate pricing. We then derive instantiations of these networks that are ‘rational by design’ in terms of naturally encoding a valid call option surface that enforces no arbitrage principles. This integration of human insight within data-driven learning provides significantly better generalisation in pricing performance due to the encoded inductive bias in the learning, guarantees sanity in the model’s predictions, and provides econometrically useful byproduct such as risk neutral density."

Seems that ML/DL works 'better' in higher moments of financial data, but I dunno, when they're noting that

"requiring our model to fit multiple days’ data (corresponding to multiple S[sub-t] values) increases the training difficulty. In our experiments, we found that the performance of neural network based models is negatively related to the number of training days. The performance of NN models...would improve if trained with one day data. This is against the established idea that more training data leads to better performance. The reason is that feeding multiple days’ data implicitly assumes the market structure is stable in those days. This is likely to be violated as the number of days grows, introducing a domain-shift problem."

Seems there's some of that academia cherry-pickin' goin on here...

The clouded mind seeks; the emptied mind finds.


Total Posts: 179
Joined: Dec 2010
Posted: 2016-12-12 15:35
I can definitely see that sort of technology being useful in the options trading landscape, but options pricing isn't really one of them...
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