Dynamic Replication and Hedging: A Reinforcement Learning Approach

Kolm, Petter N. and Gordon Ritter. "Dynamic Replication and Hedging: A Reinforcement Learning Approach." The Journal of Financial Data Science 1.1 (2019).

Posted: 5 Dec 2018 Last revised: 16 Mar 2021

See all articles by Petter N. Kolm

Petter N. Kolm

New York University (NYU) - Courant Institute of Mathematical Sciences

Gordon Ritter

New York University (NYU) - Courant Institute of Mathematical Sciences; City University of New York (CUNY) - Weissman School of Arts and Sciences; Rutgers, The State University of New Jersey - Financial Statistics & Risk Management; New York University (NYU) - NYU Tandon School of Engineering

Date Written: November 11, 2018

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

Suggested Citation

Kolm, Petter N. and Ritter, Gordon, Dynamic Replication and Hedging: A Reinforcement Learning Approach (November 11, 2018). Kolm, Petter N. and Gordon Ritter. "Dynamic Replication and Hedging: A Reinforcement Learning Approach." The Journal of Financial Data Science 1.1 (2019)., Available at SSRN: https://ssrn.com/abstract=3281235 or http://dx.doi.org/10.2139/ssrn.3281235

Petter N. Kolm

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States

Gordon Ritter (Contact Author)

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

New York University
251 Mercer Street
New York, NY 10012
United States

City University of New York (CUNY) - Weissman School of Arts and Sciences ( email )

One Bernard Baruch Way
New York, NY 10010
United States

Rutgers, The State University of New Jersey - Financial Statistics & Risk Management ( email )

110 Frelinghuysen Road
479 Hill Center, Busch Campus
Piscataway, NJ 08854
United States

New York University (NYU) - NYU Tandon School of Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States

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