Inflexible Multi-Asset Hedging of incomplete market

Ruochen Xiao, Qiaochu Feng and Ruxin Deng

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Abstract: Models trained under assumptions in the complete market usually don't take effect in the incomplete market. This paper solves the hedging problem in incomplete market with three sources of incompleteness: risk factor, illiquidity, and discrete transaction dates. A new jump-diffusion model is proposed to describe stochastic asset prices. Three neutral networks, including RNN, LSTM, Mogrifier-LSTM are used to attain hedging strategies with MSE Loss and Huber Loss implemented and compared.As a result, Mogrifier-LSTM is the fastest model with the best results under MSE and Huber Loss.

Date: 2022-11, Revised 2023-05
New Economics Papers: this item is included in nep-big, nep-cmp and nep-rmg
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