No-Transaction Band Network: A Neural Network Architecture for Efficient Deep Hedging

19 Pages Posted: 5 Mar 2021

See all articles by Shota Imaki

Shota Imaki

University of Tokyo

Kentaro Imajo

Preferred Networks, Inc.

Katsuya Ito

Preferred Networks, Inc.

Kentaro Minami

Preferred Networks, Inc.

Kei Nakagawa

Nomura Asset Mamagement Co,Ltd

Date Written: March 2, 2021

Abstract

Deep hedging (Buehler et al. 2019) is a versatile framework to compute the optimal hedging strategy of derivatives in incomplete markets. However, this optimal strategy is hard to train due to action dependence, that is, the appropriate hedging action at the next step depends on the current action. To overcome this issue, we leverage the idea of a no-transaction band strategy, which is an existing technique that gives optimal hedging strategies for European options and the exponential utility. We theoretically prove that this strategy is also optimal for a wider class of utilities and derivatives including exotics. Based on this result, we propose a no-transaction band network, a neural network architecture that facilitates fast training and precise evaluation of the optimal hedging strategy. We experimentally demonstrate that for European and lookback options, our architecture quickly attains a better hedging strategy in comparison to a standard feed-forward network.

Keywords: hedging, derivatives, deep learning, transaction costs

Suggested Citation

Imaki, Shota and Imajo, Kentaro and Ito, Katsuya and Minami, Kentaro and Nakagawa, Kei, No-Transaction Band Network: A Neural Network Architecture for Efficient Deep Hedging (March 2, 2021). Available at SSRN: https://ssrn.com/abstract=3797564 or http://dx.doi.org/10.2139/ssrn.3797564

Shota Imaki (Contact Author)

University of Tokyo ( email )

Japan

Kentaro Imajo

Preferred Networks, Inc.

Otemachi Bldg., 1-6-1 Otemachi
Chiyoda-ku, Tokyo 1000004
Japan

Katsuya Ito

Preferred Networks, Inc. ( email )

Otemachi Bldg., 1-6-1 Otemachi
Chiyoda-ku, Tokyo 1000004
Japan

Kentaro Minami

Preferred Networks, Inc. ( email )

Otemachi Bldg., 1-6-1 Otemachi
Chiyoda-ku, Tokyo 1000004
Japan

Kei Nakagawa

Nomura Asset Mamagement Co,Ltd ( email )

2-2-1, Toyosu
Koto-ku, Tokyo 135-0061
Japan

HOME PAGE: http://https://scholar.google.co.jp/citations?user=SDYNtbAAAAAJ&hl=ja

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