Deep Learning of Transition Probability Densities for Stochastic Asset Models with Applications in Option Pricing

Su, Haozhe; Tretyakov, M. V.; Newton, David P.

Abstract

Transition probability density functions (TPDFs) are fundamental to computational finance, including option pricing and hedging. Advancing recent work in deep learning, we develop novel neural TPDF generators through solving backward Kolmogorov equations in parametric space for cumulative probability functions. The generators are ultra-fast, very accurate and can be trained for any asset model described by stochastic differential equations. These are "single solve", so they do not require retraining when parameters of the stochastic model are changed (e.g. recalibration of volatility). Once trained, the neural TDPF generators can be transferred to less powerful computers where they can be used for e.g. option pricing at speeds as fast as if the TPDF were known in a closed form. We illustrate the computational efficiency of the proposed neural approximations of TPDFs by inserting them into numerical option pricing methods. We demonstrate a wide range of applications including the Black-Scholes-Merton model, the standard Heston model, the SABR model, and jump-diffusion models. These numerical experiments confirm the ultra-fast speed and high accuracy of the developed neural TPDF generators.

Citation

Su, H., Tretyakov, M. V., & Newton, D. P. (2024). Deep Learning of Transition Probability Densities for Stochastic Asset Models with Applications in Option Pricing. Management Science, https://doi.org/10.1287/mnsc.2022.01448

• Journal Article Type: Article
• Acceptance Date: Oct 9, 2023
• Online Publication Date: Jun 27, 2024
• Publication Date: Jun 27, 2024
• Deposit Date: Oct 27, 2023
• Publicly Available Date: Jun 27, 2024
• Journal: Management Science
• Print ISSN: 0025-1909
• Electronic ISSN: 1526-5501
• Publisher: INFORMS
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1287/mnsc.2022.01448
• Keywords: deep learning; transition probability density; parametric PDEs; neural networks; option pricing
• Public URL: https://nottingham-repository.worktribe.com/output/26535743