Option Hedging Through Reinforcement Learning

Federico Giorgi, Stefano Herzel () and Paolo Pigato
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Federico Giorgi: University of Rome “Tor Vergata”, Department of Economics and Finance
Stefano Herzel: University of Rome “Tor Vergata”, Department of Economics and Finance
Paolo Pigato: University of Rome “Tor Vergata”, Department of Economics and Finance

A chapter in New Perspectives in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2025, pp 169-178 from Springer

Abstract: Abstract We propose a Reinforcement Learning algorithm to hedge the payoff of a European call option. The algorithm is first tested on the Black-Scholes-Merton model, where the problem has a well known solution, so that we can compare the strategy obtained by the algorithm to the theoretical optimal one. Then, in a more realistic case that includes transaction costs, the algorithm outperforms the standard delta hedging strategy.

Keywords: Reinforcement Learning; Dynamic Strategies; Risk management (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-032-05551-4_15

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DOI: 10.1007/978-3-032-05551-4_15

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