Importance sampling for option pricing with feedforward neural networks

Aleksandar Arandjelovi\'c, Thorsten Rheinl\"ander and Pavel V. Shevchenko

Papers from arXiv.org

Abstract: We study the problem of reducing the variance of Monte Carlo estimators through performing suitable changes of the sampling measure which are induced by feedforward neural networks. To this end, building on the concept of vector stochastic integration, we characterize the Cameron-Martin spaces of a large class of Gaussian measures which are induced by vector-valued continuous local martingales with deterministic covariation. We prove that feedforward neural networks enjoy, up to an isometry, the universal approximation property in these topological spaces. We then prove that sampling measures which are generated by feedforward neural networks can approximate the optimal sampling measure arbitrarily well. We conclude with a comprehensive numerical study pricing path-dependent European options for asset price models that incorporate factors such as changing business activity, knock-out barriers, dynamic correlations, and high-dimensional baskets.

Date: 2021-12, Revised 2023-06
New Economics Papers: this item is included in nep-big and nep-cmp
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