A probabilistic approach for denoising option prices *

Djibril Gueye () and Kokulo Lawuobahsumo
Additional contact information
Djibril Gueye: Quantlabs - Quanteam
Kokulo Lawuobahsumo: UniCal - Università della Calabria [Arcavacata di Rende, Italia] = University of Calabria [Italy] = Université de Calabre [Italie]

Working Papers from HAL

Abstract: This paper aims to directly denoise option price while adhering to the no-arbitrage conditions. To achieve our goal, we propose the Gaussian Process (GP) method that entails training the GP on noisy data of option prices as a linear function of the pair of maturity and strike. Utilizing the GP approach not only allows for removing noises on the option price surface by verifying the noarbitrage conditions but also is a probabilistic approach that allows quantifying the uncertainty on the quantity of interest by constructing con dence bands around the estimate. The GP further permits forecasting out-of-the-sample prices without needing to compute the risk-neutral density of the option price surface. To investigate the e ciency of GP in removing the noise from option prices, we tested it on a simulated dataset. The overall MSE between the computed Black-Scholes prices and the GP denoised is 0.10, and between the Black-Scholes prices and the noisy prices is 2.21-a 95.33% noise removal. The curves of the graphs for the denoised prices are all convex and non-increasing in strikes, upholding the no-arbitrage conditions. To our best knowledge, the challenge of directly denoising option prices has led to little interest in this area, and our work is the rst to undertake this task.

Date: 2023-01-05
Note: View the original document on HAL open archive server: https://hal.science/hal-03919915
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hal.science/hal-03919915/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-03919915

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().