Hedging option books using neural-SDE market models

• URL: http://arxiv.org/abs/2205.15991v1
• Date: Tue, 31 May 2022 17:48:18 GMT
• Title: Hedging option books using neural-SDE market models
• Authors: Samuel N. Cohen, Christoph Reisinger, Sheng Wang
• Abstract summary: We show that neural-SDE market models achieve lower hedging errors than Black--Scholes delta and delta-vega hedging consistently over time. In addition, hedging using market models leads to similar performance to hedging using Heston models, while the former tends to be more robust during stressed market periods.
• Score: 6.319314191226118
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: We study the capability of arbitrage-free neural-SDE market models to yield effective strategies for hedging options. In particular, we derive sensitivity-based and minimum-variance-based hedging strategies using these models and examine their performance when applied to various option portfolios using real-world data. Through backtesting analysis over typical and stressed market periods, we show that neural-SDE market models achieve lower hedging errors than Black--Scholes delta and delta-vega hedging consistently over time, and are less sensitive to the tenor choice of hedging instruments. In addition, hedging using market models leads to similar performance to hedging using Heston models, while the former tends to be more robust during stressed market periods.

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