A machine learning approach to portfolio pricing and risk management for high-dimensional problems

Lucio Fernandez-Arjona and Damir Filipovi\'c
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Lucio Fernandez-Arjona: University of Zurich
Damir Filipovi\'c: EPFL and Swiss Finance Institute

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Abstract: We present a general framework for portfolio risk management in discrete time, based on a replicating martingale. This martingale is learned from a finite sample in a supervised setting. The model learns the features necessary for an effective low-dimensional representation, overcoming the curse of dimensionality common to function approximation in high-dimensional spaces. We show results based on polynomial and neural network bases. Both offer superior results to naive Monte Carlo methods and other existing methods like least-squares Monte Carlo and replicating portfolios.

Date: 2020-04, Revised 2022-05
New Economics Papers: this item is included in nep-big, nep-cmp, nep-gen and nep-rmg
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