A Reinforcement Learning Algorithm For Option Hedging

Abstract

We propose an algorithm, based on Reinforcement Learning, to hedge the payoff on a European call option. The algorithm is first tested in a model where the problem has a well known analytic solution, so that we can compare the strategy obtained by the algorithm to the theoretical optimal one. In a more realistic case, considering transaction costs, the algorithm outperforms the standard delta hedging strategy.

Keywords: Reinforcement Learning, Dynamic Strategies, Risk management