Autoencoder Option Pricing Models

46 Pages Posted:

See all articles by Gustavo Freire

Gustavo Freire

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Evgenii Vladimirov

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute

Date Written: July 31, 2023

Abstract

We propose a new framework allowing to estimate non-parametric affine and non-affine option pricing models. Our method applies autoencoder neural networks to the log-characteristic function implied by observed option prices. Since the log-characteristic function is linear in the state factors under the affine assumption, we obtain a data-driven affine model by specifying a linear mapping in the autoencoder architecture. Alternatively, we let the data speak about any needed non-linearities to estimate a non-affine model. Using an extensive panel of S&P 500 options, our approach reveals that the non-affine class of models only outperforms the affine class in pricing options out-of-sample when the number of factors is small and the prediction horizon is not far ahead into the future.

Keywords: Characteristic function, Affine jump-diffusion models, Latent factor models, Autoencoders, Option pricing

JEL Classification: C14, C58, G13

Suggested Citation

Freire, Gustavo and Vladimirov, Evgenii, Autoencoder Option Pricing Models (July 31, 2023). Available at SSRN: https://ssrn.com/abstract=

Gustavo Freire (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://https://www.eur.nl/people/gustavo-freire

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://https://tinbergen.nl/person/2029/gustavo-freire

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

HOME PAGE: http://https://www.erim.eur.nl/people/gustavo-freire/

Evgenii Vladimirov

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

Amsterdam
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
17
Abstract Views
62
PlumX Metrics