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Author : Thishan Hansragh
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (134 download)
Download or read book Hedging Options with Transaction Costs Using Stochastic Control and Machine Learning written by Thishan Hansragh and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : T. L. Lai
Publisher :
ISBN 13 :
Total Pages : 28 pages
Book Rating : 4.:/5 (768 download)
Download or read book A New Approach to Singular Stochastic Control in Optimal Hedging and Investment-consumption Under Transaction Costs written by T. L. Lai and published by . This book was released on 2006 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Roy Kouwenberg
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
Download or read book Hedging Options Under Transaction Costs and Stochastic Volatility written by Roy Kouwenberg and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility. Extensive research has clearly demonstrated that the volatility of most stocks is not constant over time. As small changes of the volatility can have a major impact on the value of contingent claims, hedging strategies should try to eliminate this volatility risk. We propose a stochastic optimization model for hedging contingent claims that takes into account the effects of stochastic volatility, transaction costs and trading restrictions. Simulation results show that our approach could improve performance considerably compared to traditional hedging strategies.
Author : Jacek Gondzio
Publisher :
ISBN 13 :
Total Pages : 29 pages
Book Rating : 4.:/5 (247 download)
Download or read book Hedging Options Under Transaction Costs and Stochastic Volatility written by Jacek Gondzio and published by . This book was released on 1999 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Hans Buehler
Publisher :
ISBN 13 :
Total Pages : 32 pages
Book Rating : 4.:/5 (13 download)
Download or read book Deep Hedging written by Hans Buehler and published by . This book was released on 2019 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a framework for hedging a portfolio of derivatives in the presence of market frictions such as transaction costs, market impact, liquidity constraints or risk limits using modern deep reinforcement machine learning methods.We discuss how standard reinforcement learning methods can be applied to non-linear reward structures, i.e. in our case convex risk measures. As a general contribution to the use of deep learning for stochastic processes, we also show in section 4 that the set of constrained trading strategies used by our algorithm is large enough to ∈-approximate any optimal solution.Our algorithm can be implemented efficiently even in high-dimensional situations using modern machine learning tools. Its structure does not depend on specific market dynamics, and generalizes across hedging instruments including the use of liquid derivatives. Its computational performance is largely invariant in the size of the portfolio as it depends mainly on the number of hedging instruments available.We illustrate our approach by showing the effect on hedging under transaction costs in a synthetic market driven by the Heston model, where we outperform the standard “complete market” solution.This is the "stochastic analysis" version of the paper. A version in machine learning notation is available here "https://ssrn.com/abstract=3355706" https://ssrn.com/abstract=3355706.
Author : Huu-Thai Nguyen
Publisher :
ISBN 13 :
Total Pages : 215 pages
Book Rating : 4.:/5 (898 download)
Download or read book Approximate Hedging with Transaction Costs and Leland's Algorithm in Stochastic Volatility Markets written by Huu-Thai Nguyen and published by . This book was released on 2014 with total page 215 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis studies the problem of approximate hedging with constant proportional transaction costs in stochastic volatility models in different situations, using a simpler form for adjusted volatility in the Leland's algorithm. We show that asymptotic properties of hedging error are the same to those in deterministic volatility models and the rate of convergence can be impoved by controlling the model parameter. These can be extended to the case where transaction costs are defined by a general rule. We also show that jumps appear in asset price and/or in stochastic volatility do not affect asymptotic property of hedging error. In the next part, we consider the problem of approximate hedging in the presence of liquidity risks suggested by Cetin, Jarrow and Protter, of which proportional transaction costs models are a particular case. We show that liquidity costs due to smooth supply surves can be ignored using Leland's increasing volatility principle. In the third part, we study the case where the option is written on multiple risky assets. We demonstrate that approximately complete replication can be reached for exchange options using the same parameter suggested by Leland, but it is far from being obvious for other kinds of exotic options. Finally, we propose a simple method to reduce the option price which clearly approaches to the super hedging price in Leland's algorithm. whenever the seller accepts to take a risk defined by a given significance level.
Author : Ilya German
Publisher :
ISBN 13 :
Total Pages : 118 pages
Book Rating : 4.E/5 ( download)
Download or read book Hedging Options with Small Transaction Costs written by Ilya German and published by . This book was released on 1999 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Peter J. Meindl
Publisher :
ISBN 13 :
Total Pages : 36 pages
Book Rating : 4.:/5 (129 download)
Download or read book Dynamic Hedging of Vanilla and Exotic Options with Transaction Costs written by Peter J. Meindl and published by . This book was released on 2005 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: The classical finance problem of dynamically hedging a short option in a discrete time environment with transaction costs has generally been approached through either a sub-optimal analytical solution with an instantaneous horizon or through the formulation of a long term horizon dynamic program whose solution is often computationally out of reach. We propose a new methodology to solve the dynamic hedging problem that combines the long term horizon of dynamic programming with computational feasibility, a major feature of the analytic methods. Our methodology has two key performance attributes: first, the ability to significantly reduce expected absolute hedging error on vanilla options where analytic solutions exist and second, the ability to be applied to exotics without analytic solutions where our methodology outperforms heuristic methods. We compare the results of our methodology, which utilizes tools from control theory and stochastic programming, to existing analytic delta hedging methodologies from Black and Scholes (1973) and Leland (1985) when we are shorting vanilla options. Simulation reveals our methodology can produce significantly lower expected absolute hedging error, in both a statistical and economic sense, than these analytic methods. When hedging exotic options where no analytic solution exists we can also apply our methodology. We dynamically hedge a 10 asset basket call option and show that our methodology significantly outperforms the expected absolute hedging error of heuristic hedging methodologies. We perform our tests on simulated underlying assets as well as on empirical Samp;P 500 data showing our methodology's superiority in each case. We believe this is an exciting new dynamic hedging methodology given this strong performance and applicability to both vanilla and exotic options.
Author : Benjamin Bruder
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (116 download)
Download or read book Stochastic Control and Applications to Option Hedging with Illiquidity written by Benjamin Bruder and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Stein-Erik Fleten
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (112 download)
Download or read book Optimal Hedging Strategies for Multi-periodGuarantees in the Presence of Transaction Costs:A Stochastic Programming Approach written by Stein-Erik Fleten and published by . This book was released on 2006 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Stein-Erik Fleten
Publisher :
ISBN 13 :
Total Pages : 17 pages
Book Rating : 4.:/5 (129 download)
Download or read book Optimal Hedging Strategies for Multi-Period Guarantees in the Presence of Transaction Costs written by Stein-Erik Fleten and published by . This book was released on 2012 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: Multi-period guarantees are often embedded in life insurance contracts. In this paper we consider the problem of hedging these multi-period guarantees in the presence of transaction costs. We derive the hedging strategies for the cheapest hedge portfolio for a multi-period guarantee that with certainty makes the insurance company able to meet the obligations from the insurance policies it has issued. We find that by imposing transaction costs, the insurance company reduces the rebalancing of the hedge portfolio. The cost of establishing the hedge portfolio also increases as the transaction cost increases. For the multi-period guarantee there is a rather large rebalancing of the hedge portfolio as we go from one period to the next. By introducing transaction costs we find the size of this rebalancing to be reduced. Transaction costs may therefore be one possible explanation for why we do not see the insurance companies performing a large rebalancing of their investment portfolio at the end of each year.
Author : Valeriy Zakamulin
Publisher :
ISBN 13 :
Total Pages : 27 pages
Book Rating : 4.:/5 (129 download)
Download or read book The Best Hedging Strategy in the Presence of Transaction Costs written by Valeriy Zakamulin and published by . This book was released on 2008 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: Considerable theoretical work has been devoted to the problem of option pricing and hedging with transaction costs. A variety of methods have been suggested and are currently being used for dynamic hedging of options in the presence of transaction costs. However, very little was done on the subject of an empirical comparison of different methods for option hedging with transaction costs. In a few existing studies the different methods are compared by studying their empirical performances in hedging only a plain-vanilla short call option. The reader is tempted to assume that the ranking of the different methods for hedging any kind of option remains the same as that for a vanilla call. The main goal of this paper is to show that the ranking of the alternative hedging strategies depends crucially on the type of the option position being hedged and the risk preferences of the hedger. In addition, we present and implement a simple optimization method that, in some cases, improves considerably the performance of some hedging strategies.
Author : Artur Sepp
Publisher :
ISBN 13 :
Total Pages : 37 pages
Book Rating : 4.:/5 (13 download)
Download or read book When You Hedge Discretely written by Artur Sepp and published by . This book was released on 2015 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the delta-hedging strategy for a vanilla option under the discrete hedging and transaction costs, assuming that an option is delta-hedged using the Black-Scholes-Merton model with the log-normal volatility implied by the market price of the option. We analyze the expected profit-and-loss (P&L) of the delta-hedging strategy assuming the four possible dynamics of asset returns under the statistical measure: the log-normal diffusion, the jump-diffusion, the stochastic volatility and the stochastic volatility with jumps. For all of the four models, we derive analytic formulas for the expected P&L, expected transaction costs, and P&L volatility assuming hedging at fixed times. Using these formulas, we formulate the problem of finding the optimal hedging frequency to maximize the Sharpe ratio of the delta-hedging strategy. Also, we show that the Sharpe ratio of the delta-hedging strategy can be improved by incorporating the price and delta bands for the rebalancing of the delta-hedge and provide analytical approximations for computing the optimal bands in our optimization approach. As illustrations, we show that our method provides a very good approximation to the actual Sharpe ratio obtained by Monte Carlo simulations under the time-based re-hedging. In contrary to Monte Carlo simulations, our analytic approach provide a fast and an accurate way to estimate the risk-reward characteristic of the delta-hedging strategy for real time computations.
Author : Álvaro Cartea
Publisher : Cambridge University Press
ISBN 13 : 1316453650
Total Pages : 360 pages
Book Rating : 4.3/5 (164 download)
Download or read book Algorithmic and High-Frequency Trading written by Álvaro Cartea and published by Cambridge University Press. This book was released on 2015-08-06 with total page 360 pages. Available in PDF, EPUB and Kindle. Book excerpt: The design of trading algorithms requires sophisticated mathematical models backed up by reliable data. In this textbook, the authors develop models for algorithmic trading in contexts such as executing large orders, market making, targeting VWAP and other schedules, trading pairs or collection of assets, and executing in dark pools. These models are grounded on how the exchanges work, whether the algorithm is trading with better informed traders (adverse selection), and the type of information available to market participants at both ultra-high and low frequency. Algorithmic and High-Frequency Trading is the first book that combines sophisticated mathematical modelling, empirical facts and financial economics, taking the reader from basic ideas to cutting-edge research and practice. If you need to understand how modern electronic markets operate, what information provides a trading edge, and how other market participants may affect the profitability of the algorithms, then this is the book for you.
Author : Gerasimos G. Rigatos
Publisher : Springer
ISBN 13 : 3319528661
Total Pages : 329 pages
Book Rating : 4.3/5 (195 download)
Download or read book State-Space Approaches for Modelling and Control in Financial Engineering written by Gerasimos G. Rigatos and published by Springer. This book was released on 2017-04-04 with total page 329 pages. Available in PDF, EPUB and Kindle. Book excerpt: The book conclusively solves problems associated with the control and estimation of nonlinear and chaotic dynamics in financial systems when these are described in the form of nonlinear ordinary differential equations. It then addresses problems associated with the control and estimation of financial systems governed by partial differential equations (e.g. the Black–Scholes partial differential equation (PDE) and its variants). Lastly it an offers optimal solution to the problem of statistical validation of computational models and tools used to support financial engineers in decision making. The application of state-space models in financial engineering means that the heuristics and empirical methods currently in use in decision-making procedures for finance can be eliminated. It also allows methods of fault-free performance and optimality in the management of assets and capitals and methods assuring stability in the functioning of financial systems to be established. Covering the following key areas of financial engineering: (i) control and stabilization of financial systems dynamics, (ii) state estimation and forecasting, and (iii) statistical validation of decision-making tools, the book can be used for teaching undergraduate or postgraduate courses in financial engineering. It is also a useful resource for the engineering and computer science community
Author : Yuri Kabanov
Publisher : Springer Science & Business Media
ISBN 13 : 3540681213
Total Pages : 306 pages
Book Rating : 4.5/5 (46 download)
Download or read book Markets with Transaction Costs written by Yuri Kabanov and published by Springer Science & Business Media. This book was released on 2009-12-04 with total page 306 pages. Available in PDF, EPUB and Kindle. Book excerpt: The book is the first monograph on this highly important subject.
Author : Tony Guida
Publisher : John Wiley & Sons
ISBN 13 : 1119522196
Total Pages : 308 pages
Book Rating : 4.1/5 (195 download)
Download or read book Big Data and Machine Learning in Quantitative Investment written by Tony Guida and published by John Wiley & Sons. This book was released on 2019-03-25 with total page 308 pages. Available in PDF, EPUB and Kindle. Book excerpt: Get to know the ‘why’ and ‘how’ of machine learning and big data in quantitative investment Big Data and Machine Learning in Quantitative Investment is not just about demonstrating the maths or the coding. Instead, it’s a book by practitioners for practitioners, covering the questions of why and how of applying machine learning and big data to quantitative finance. The book is split into 13 chapters, each of which is written by a different author on a specific case. The chapters are ordered according to the level of complexity; beginning with the big picture and taxonomy, moving onto practical applications of machine learning and finally finishing with innovative approaches using deep learning. • Gain a solid reason to use machine learning • Frame your question using financial markets laws • Know your data • Understand how machine learning is becoming ever more sophisticated Machine learning and big data are not a magical solution, but appropriately applied, they are extremely effective tools for quantitative investment — and this book shows you how.
