A Reinforcement Learning Algorithm For Option Hedging

Federico Giorgi (), Stefano Herzel () and Paolo Pigato
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Federico Giorgi: DEF, University of Rome "Tor Vergata", http://www.ceistorvergata.it
Stefano Herzel: DEF, University of Rome "Tor Vergata", http://www.ceistorvergata.it

No 586, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: We propose an algorithm, based on Reinforcement Learning, to hedge the payoff on a European call option. The algorithm is first tested in a model where the problem has a well known analytic solution, so that we can compare the strategy obtained by the algorithm to the theoretical optimal one. In a more realistic case, considering transaction costs, the algorithm outperforms the standard delta hedging strategy.

Keywords: Reinforcement Learning; Dynamic Strategies; Risk management (search for similar items in EconPapers)
Pages: 30 pages
Date: 2024-12-17, Revised 2024-12-17
New Economics Papers: this item is included in nep-big, nep-cmp and nep-rmg
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