Machine learning solutions to challenges in finance: An application to the pricing of financial products

Gan, Lirong; Wang, Huamao; Yang, Zhaojun

Abstract

© 2020 Elsevier Inc. The recent fast development of machine learning provides new tools to solve challenges in many areas. In finance, average options are popular financial products among corporations, institutional investors, and individual investors for risk management and investment because average options have the advantages of cheap prices and their payoffs are not very sensitive to the changes of the underlying asset prices at the maturity date, avoiding the manipulation of asset prices and option prices. The challenge is that pricing arithmetic average options requires traditional numerical methods with the drawbacks of expensive repetitive computations and non-realistic model assumptions. This paper proposes a machine-learning method to price arithmetic and geometric average options accurately and in particular quickly. The method is model-free and it is verified by empirical applications as well as numerical experiments.

Citation

Gan, L., Wang, H., & Yang, Z. (2020). Machine learning solutions to challenges in finance: An application to the pricing of financial products. Technological Forecasting and Social Change, 153, https://doi.org/10.1016/j.techfore.2020.119928

• Journal Article Type: Article
• Acceptance Date: Jan 20, 2020
• Online Publication Date: Jan 25, 2020
• Publication Date: Apr 1, 2020
• Deposit Date: Apr 7, 2020
• Publicly Available Date: Jul 26, 2021
• Journal: Technological Forecasting and Social Change
• Print ISSN: 0040-1625
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 153
• Article Number: 119928
• DOI: https://doi.org/10.1016/j.techfore.2020.119928
• Keywords: Management of Technology and Innovation; Applied Psychology; Business and International Management
• Public URL: https://nottingham-repository.worktribe.com/output/4267030
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0040162519312399?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Machine learning solutions to challenges in finance: An application to the pricing of financial products; Journal Title: Technological Forecasting and Social Change; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.techfore.2020.119928; Content Type: article; Copyright: © 2020 Elsevier Inc. All rights reserved.