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Is the difference between deep hedging and delta hedging a statistical arbitrage?

Author

Listed:
  • François, Pascal
  • Gauthier, Geneviève
  • Godin, Frédéric
  • Mendoza, Carlos Octavio Pérez

Abstract

Horikawa and Nakagawa (2024) claim that in a complete market admitting statistical arbitrage, the difference between the deep hedging and the replicating portfolio hedging positions is a statistical arbitrage. Deep hedging can thus include an undesirable speculative component. We test whether this remains true in a GARCH-based incomplete market dynamics. We observe that the difference between deep hedging and delta hedging is a speculative overlay if the risk measure considered does not put sufficient relative weight on adverse outcomes. Nevertheless, a suitable choice of risk measure can prevent the deep hedging agent from engaging in speculation.

Suggested Citation

  • François, Pascal & Gauthier, Geneviève & Godin, Frédéric & Mendoza, Carlos Octavio Pérez, 2025. "Is the difference between deep hedging and delta hedging a statistical arbitrage?," Finance Research Letters, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:finlet:v:73:y:2025:i:c:s1544612324016192
    DOI: 10.1016/j.frl.2024.106590
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    More about this item

    Keywords

    Deep reinforcement learning; Optimal hedging; Arbitrage;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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