Estimating risks of option books using neural-SDE market models
35 Pages Posted: 16 Feb 2022
Date Written: February 15, 2022
In this paper, we examine the capacity of an arbitrage-free neural-SDE market model to produce realistic scenarios for the joint dynamics of multiple European options on a single underlying. We subsequently demonstrate its use as a risk simulation engine for option portfolios. Through backtesting analysis, we show that our models are more computationally efficient and accurate for evaluating the Value-at-Risk (VaR) of option portfolios, with better coverage performance and less procyclicality than standard filtered historical simulation approaches.
Keywords: Market models, European options; risk measures, market simulators; no-arbitrage, neural SDE
JEL Classification: C14, C45, C51
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