Is the difference between deep hedging and delta hedging a statistical arbitrage?

Pascal François, Geneviève Gauthier, Frédéric Godin and Carlos Octavio Pérez Mendoza

Finance Research Letters, 2025, vol. 73, issue C

Abstract: Horikawa and Nakagawa (2024) claim that in a complete market admitting statistical arbitrage, the difference between the deep hedging and the replicating portfolio hedging positions is a statistical arbitrage. Deep hedging can thus include an undesirable speculative component. We test whether this remains true in a GARCH-based incomplete market dynamics. We observe that the difference between deep hedging and delta hedging is a speculative overlay if the risk measure considered does not put sufficient relative weight on adverse outcomes. Nevertheless, a suitable choice of risk measure can prevent the deep hedging agent from engaging in speculation.

Keywords: Deep reinforcement learning; Optimal hedging; Arbitrage (search for similar items in EconPapers)
JEL-codes: C45 C61 G32 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1544612324016192
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:73:y:2025:i:c:s1544612324016192

DOI: 10.1016/j.frl.2024.106590

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().