The option pricing model based on time values: an application of the universal approximation theory on unbounded domains

Yang Qu and Ming-Xi Wang

Papers from arXiv.org

Abstract: We propose a time value related decision function to treat a classical option pricing problem raised by Hutchinson-Lo-Poggio. In numerical experiments, the new decision function significantly improves the original model of Hutchinson-Lo-Poggio with faster convergence and better generalization performance. By proving a novel universal approximation theorem, we show that our decision function rather than Hutchinson-Lo-Poggio's can be approximated on the entire domain of definition by neural networks. Thus the experimental results are partially explained by the representation properties of networks.

Date: 2019-10, Revised 2021-04
New Economics Papers: this item is included in nep-big
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