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A Deep Learning Based Numerical PDE Method for Option Pricing

Author

Listed:
  • Xiang Wang

    (Nanchang University)

  • Jessica Li

    (Brown University)

  • Jichun Li

    (University of Nevada)

Abstract

Proper pricing of options in the financial derivative market is crucial. For many options, it is often impossible to obtain analytical solutions to the Black–Scholes (BS) equation. Hence an accurate and fast numerical method is very beneficial for option pricing. In this paper, we use the Physics-Informed Neural Networks (PINNs) method recently developed by Raissi et al. (J Comput Phys 378:686–707, 2019) to solve the BS equation. Many experiments have been carried out for solving various option pricing models. Compared with traditional numerical methods, the PINNs based method is simple in implementation, but with comparable accuracy and computational speed, which illustrates a promising potential of deep neural networks for solving more complicated BS equations.

Suggested Citation

  • Xiang Wang & Jessica Li & Jichun Li, 2023. "A Deep Learning Based Numerical PDE Method for Option Pricing," Computational Economics, Springer;Society for Computational Economics, vol. 62(1), pages 149-164, June.
    • Handle: RePEc:kap:compec:v:62:y:2023:i:1:d:10.1007_s10614-022-10279-x
    DOI: 10.1007/s10614-022-10279-x
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    References listed on IDEAS

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    1. Antoon Pelsser, "undated". "Pricing Double Barrier Options: An Analytical Approach," Computing in Economics and Finance 1997 130, Society for Computational Economics.
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    Citations

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    Cited by:

    1. Guo, Jingjun & Kang, Weiyi & Wang, Yubing, 2024. "Multi-perspective option price forecasting combining parametric and non-parametric pricing models with a new dynamic ensemble framework," Technological Forecasting and Social Change, Elsevier, vol. 204(C).
    2. Prudence Djagba & Callixte Ndizihiwe, 2024. "Pricing American Options using Machine Learning Algorithms," Papers 2409.03204, arXiv.org.
    3. Dufera, Tamirat Temesgen, 2024. "Fractional Brownian motion in option pricing and dynamic delta hedging: Experimental simulations," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
    4. Naman Krishna Pande & Puneet Pasricha & Arun Kumar & Arvind Kumar Gupta, 2024. "European Option Pricing in Regime Switching Framework via Physics-Informed Residual Learning," Papers 2410.10474, arXiv.org.

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