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Backward Deep BSDE Methods and Applications to Nonlinear Problems

Author

Listed:
  • Yajie Yu

    (Corporate Model Risk, Wells Fargo, New York, NY 10017, USA)

  • Narayan Ganesan

    (Corporate Model Risk, Wells Fargo, New York, NY 10017, USA)

  • Bernhard Hientzsch

    (Corporate Model Risk, Wells Fargo, New York, NY 10017, USA)

Abstract

We present a pathwise deep Backward Stochastic Differential Equation (BSDE) method for Forward Backward Stochastic Differential Equations with terminal conditions that time-steps the BSDE backwards and apply it to the differential rates problem as a prototypical nonlinear problem of independent financial interest. The nonlinear equation for the backward time-step is solved exactly or by a Taylor-based approximation. This is the first application of such a pathwise backward time-stepping deep BSDE approach for problems with nonlinear generators. We extend the method to the case when the initial value of the forward components X can be a parameter rather than fixed and similarly to also learn values at intermediate times. We present numerical results for a call combination and for a straddle, the latter comparing well to those obtained by Forsyth and Labahn with a specialized PDE solver.

Suggested Citation

  • Yajie Yu & Narayan Ganesan & Bernhard Hientzsch, 2023. "Backward Deep BSDE Methods and Applications to Nonlinear Problems," Risks, MDPI, vol. 11(3), pages 1-16, March.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:3:p:61-:d:1099372
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    References listed on IDEAS

    as
    1. Haojie Wang & Han Chen & Agus Sudjianto & Richard Liu & Qi Shen, 2018. "Deep Learning-Based BSDE Solver for Libor Market Model with Application to Bermudan Swaption Pricing and Hedging," Papers 1807.06622, arXiv.org, revised Sep 2018.
    2. Warin Xavier, 2018. "Nesting Monte Carlo for high-dimensional non-linear PDEs," Monte Carlo Methods and Applications, De Gruyter, vol. 24(4), pages 225-247, December.
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    Cited by:

    1. Bernhard Hientzsch, 2023. "Reinforcement Learning and Deep Stochastic Optimal Control for Final Quadratic Hedging," Papers 2401.08600, arXiv.org.

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