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Neural networks for option pricing and hedging: a literature review

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  • Johannes Ruf
  • Weiguan Wang

Abstract

Neural networks have been used as a nonparametric method for option pricing and hedging since the early 1990s. Far over a hundred papers have been published on this topic. This note intends to provide a comprehensive review. Papers are compared in terms of input features, output variables, benchmark models, performance measures, data partition methods, and underlying assets. Furthermore, related work and regularisation techniques are discussed.

Suggested Citation

  • Johannes Ruf & Weiguan Wang, 2019. "Neural networks for option pricing and hedging: a literature review," Papers 1911.05620, arXiv.org, revised May 2020.
    • Handle: RePEc:arx:papers:1911.05620
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    References listed on IDEAS

    as
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    20. Wan-Ni Lai, 2014. "Comparison of methods to estimate option implied risk-neutral densities," Quantitative Finance, Taylor & Francis Journals, vol. 14(10), pages 1839-1855, October.
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    27. Ryan Ferguson & Andrew Green, 2018. "Deeply Learning Derivatives," Papers 1809.02233, arXiv.org, revised Oct 2018.
    28. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    29. Chris Charalambous & Spiros Martzoukos, 2005. "Hybrid artificial neural networks for efficient valuation of real options and financial derivatives," Computational Management Science, Springer, vol. 2(2), pages 155-161, March.
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    32. Gunter Meissner & Noriko Kawano, 2001. "Capturing the volatility smile of options on high-tech stocks—A combined GARCH-neural network approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 25(3), pages 276-292, September.
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    37. Hull, John & White, Alan, 2017. "Optimal delta hedging for options," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 180-190.
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    39. Charles J. Corrado & Tie Su, 1996. "Skewness And Kurtosis In S&P 500 Index Returns Implied By Option Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 175-192, June.
    40. Montagna, Guido & Morelli, Marco & Nicrosini, Oreste & Amato, Paolo & Farina, Marco, 2003. "Pricing derivatives by path integral and neural networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 189-195.
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