Accurate Neural Network Option Pricing Methods with Control Variate Techniques and Data Synthesis/Cleaning with Financial Rationality

This paper enhances option pricing accuracy by incorporating financial expertise into a neural network (NN) design and optimizing data sample quality through cleaning and synthesis. Instead of directly estimating option values (OVs) with NNs, we leverage the concept of control variate by decomposing OVs as time values (TVs) estimated by NNs, plus the analytically solvable intrinsic values (IVs). TV surface can be decomposed into two scenarios with very different properties, and we design two NNs according to our derived no-arbitrage constraints for these two scenarios. To alleviate learning inaccuracy due to the kink of the TV surface along the scenario boundary, we synthesize training samples based on our derived constraints to smoothly extend the surface for each scenario. On the other hand, irrational option quotes commonly found in illiquid markets incur uneven surfaces, significantly deteriorating NN predictability. We develop a learnable data-cleaning method to remove potentially irrational quotes spotted by no-arbitrage constraints properly. Besides, unnecessary data syntheses proposed in previous literature can also be removed by incorporating corresponding constraints into our NN to enhance training efficiency. Comprehensive experiments on liquid S&P 500 and illiquid TAIEX option markets examine the superiority of our approach.

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Publication Details

Published
2024-10-20
DOI
https://doi.org/10.1145/3627673.3679530
Citations
1
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
0.54
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article

Accurate Neural Network Option Pricing Methods with Control Variate Techniques and Data Synthesis/Cleaning with Financial Rationality

Tian‐Shyr Dai, Chuan‐Ju Wang, Ying-ping Chen, Chia-Wei Hsu
1 citations
Stochastic processes and financial applications
0.54
article

Accurate Neural Network Option Pricing Methods with Control Variate Techniques and Data Synthesis/Cleaning with Financial Rationality

Tian‐Shyr Dai, Chuan‐Ju Wang, Ying-ping Chen, Chia-Wei Hsu
article en
1 citations

Abstract

This paper enhances option pricing accuracy by incorporating financial expertise into a neural network (NN) design and optimizing data sample quality through cleaning and synthesis. Instead of directly estimating option values (OVs) with NNs, we leverage the concept of control variate by decomposing OVs as time values (TVs) estimated by NNs, plus the analytically solvable intrinsic values (IVs). TV surface can be decomposed into two scenarios with very different properties, and we design two NNs according to our derived no-arbitrage constraints for these two scenarios. To alleviate learning inaccuracy due to the kink of the TV surface along the scenario boundary, we synthesize training samples based on our derived constraints to smoothly extend the surface for each scenario. On the other hand, irrational option quotes commonly found in illiquid markets incur uneven surfaces, significantly deteriorating NN predictability. We develop a learnable data-cleaning method to remove potentially irrational quotes spotted by no-arbitrage constraints properly. Besides, unnecessary data syntheses proposed in previous literature can also be removed by incorporating corresponding constraints into our NN to enhance training efficiency. Comprehensive experiments on liquid S&P 500 and illiquid TAIEX option markets examine the superiority of our approach.

National Yang Ming Chiao Tung University (TW), Research Center for Information Technology Innovation, Academia Sinica (TW), National Chengchi University (TW)
Industry, innovation and infrastructure
Openalex Percentile: Top 29%
Stochastic processes and financial applications
0.54
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Accurate Neural Network Option Pricing Methods with Control Variate Techniques and Data Synthesis/Cleaning with Financial Rationality — Tian‐Shyr Dai, Chuan‐Ju Wang, et al. · (2024) | TGRS Research Map | TGRS