Dynamic Replication and Hedging: A Reinforcement Learning Approach

Abstract

We address the problem of how to optimally hedge an options book in a practical setting, where trading decisions are discrete and trading costs can be nonlinear and difficult to model. Based on reinforcement learning, a well-established machine learning technique, our model is shown to be flexible, accurate and very promising for real-world applications.

Keywords: Finance; Hedging; Investment analysis; Machine learning; Optimal control; Options; Portfolio optimization; Reinforcement learning

JEL Classification: G11, C61