Deep Surrogates for Finance: With an Application to Option Pricing

60 Pages Posted: 12 Mar 2021 Last revised: 28 Nov 2022

See all articles by Hui Chen

Hui Chen

Massachusetts Institute of Technology

Antoine Didisheim

Swiss Finance Institute, UNIL

Simon Scheidegger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Date Written: February 9, 2021

Abstract

We introduce ``deep surrogates'', a novel approach to speed up structural models' evaluation and estimation by orders of magnitude, thereby allowing for various compute-intensive applications that were previously intractable. As an application, we build surrogates for popular option pricing models. The surrogates make daily re-estimation of the model's parameters computationally feasible. With these re-estimations, we compare the out-of-sample performance to non-parametric alternatives. More importantly, we can show that parameter instability for the structural models is positively correlated with options market illiquidity. Furthermore, the surrogates make it easy to extract model-implied conditional tail risk measures and predictive distributions of option returns.

Keywords: Deep Learning, Structural Estimation, Option Pricing, Parameter Stability

JEL Classification: C45, C52, C58, C61, G17

Suggested Citation

Chen, Hui and Didisheim, Antoine and Scheidegger, Simon, Deep Surrogates for Finance: With an Application to Option Pricing (February 9, 2021). Available at SSRN: https://ssrn.com/abstract=3782722 or http://dx.doi.org/10.2139/ssrn.3782722

Hui Chen

Massachusetts Institute of Technology ( email )

50 Memorial Drive
Cambridge, MA 02142
United States
+1 (617) 324-3896 (Phone)

Antoine Didisheim

Swiss Finance Institute, UNIL ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
0797605012 (Phone)

Simon Scheidegger (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

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