Physics-Informed Convolutional Transformer for Predicting Volatility Surface

Soohan Kim, Seok-Bae Yun, Hyeong-Ohk Bae, Muhyun Lee and Youngjoon Hong

Papers from arXiv.org

Abstract: Predicting volatility is important for asset predicting, option pricing and hedging strategies because it cannot be directly observed in the financial market. The Black-Scholes option pricing model is one of the most widely used models by market participants. Notwithstanding, the Black-Scholes model is based on heavily criticized theoretical premises, one of which is the constant volatility assumption. The dynamics of the volatility surface is difficult to estimate. In this paper, we establish a novel architecture based on physics-informed neural networks and convolutional transformers. The performance of the new architecture is directly compared to other well-known deep-learning architectures, such as standard physics-informed neural networks, convolutional long-short term memory (ConvLSTM), and self-attention ConvLSTM. Numerical evidence indicates that the proposed physics-informed convolutional transformer network achieves a superior performance than other methods.

Date: 2022-09, Revised 2023-11
New Economics Papers: this item is included in nep-big, nep-cmp, nep-for and nep-rmg
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