Data-driven Hedging of Stock Index Options via Deep Learning

Jie Chen and Lingfei Li

Papers from arXiv.org

Abstract: We develop deep learning models to learn the hedge ratio for S&P500 index options directly from options data. We compare different combinations of features and show that a feedforward neural network model with time to maturity, Black-Scholes delta and a sentiment variable (VIX for calls and index return for puts) as input features performs the best in the out-of-sample test. This model significantly outperforms the standard hedging practice that uses the Black-Scholes delta and a recent data-driven model. Our results demonstrate the importance of market sentiment for hedging efficiency, a factor previously ignored in developing hedging strategies.

Date: 2021-11
New Economics Papers: this item is included in nep-big, nep-cmp, nep-cwa, nep-fmk and nep-rmg
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