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Option pricing in the Heston model with physics inspired neural networks

Author

Listed:
  • Donatien Hainaut

    (UCLouvain- LIDAM)

  • Alex Casas

    (Detralytics)

Abstract

In absence of a closed form expression such as in the Heston model, the option pricing is computationally intensive when calibrating a model to market quotes. this article proposes an alternative to standard pricing methods based on physics-inspired neural networks (PINNs). A PINN integrates principles from physics into its learning process to enhance its efficiency in solving complex problems. In this article, the driving principle is the Feynman-Kac (FK) equation, which is a partial differential equation (PDE) governing the derivative price in the Heston model. We focus on the valuation of European options and show that PINNs constitute an efficient alternative for pricing options with various specifications and parameters without the need for retraining.

Suggested Citation

  • Donatien Hainaut & Alex Casas, 2024. "Option pricing in the Heston model with physics inspired neural networks," Annals of Finance, Springer, vol. 20(3), pages 353-376, September.
    • Handle: RePEc:kap:annfin:v:20:y:2024:i:3:d:10.1007_s10436-024-00452-7
    DOI: 10.1007/s10436-024-00452-7
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    References listed on IDEAS

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    More about this item

    Keywords

    Neural networks; Options; Heston model; Feynman-Kac equation;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • G1 - Financial Economics - - General Financial Markets

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