Neural Network Pricing of American Put Options
In this study, we use Neural Networks (NNs) to price American put options. We propose two NN models—a simple one and a more complex one—and we discuss the performance of two NN models with the Least-Squares Monte Carlo (LSM) method. This study relies on American put option market prices, for four la...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2020-07-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/8/3/73 |
| _version_ | 1797563461091196928 |
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| author | Raquel M. Gaspar Sara D. Lopes Bernardo Sequeira |
| author_facet | Raquel M. Gaspar Sara D. Lopes Bernardo Sequeira |
| author_sort | Raquel M. Gaspar |
| collection | DOAJ |
| description | In this study, we use Neural Networks (NNs) to price American put options. We propose two NN models—a simple one and a more complex one—and we discuss the performance of two NN models with the Least-Squares Monte Carlo (LSM) method. This study relies on American put option market prices, for four large U.S. companies—Procter and Gamble Company (PG), Coca-Cola Company (KO), General Motors (GM), and Bank of America Corp (BAC). Our dataset is composed of all options traded within the period December 2018 until March 2019. Although on average, both NN models perform better than LSM, the simpler model (NN Model 1) performs quite close to LSM. Moreover, the second NN model substantially outperforms the other models, having an RMSE ca. 40% lower than the presented by LSM. The lower RMSE is consistent across all companies, strike levels, and maturities. In summary, all methods present a good accuracy; however, after calibration, NNs produce better results in terms of both execution time and Root Mean Squared Error (RMSE). |
| first_indexed | 2024-03-10T18:43:59Z |
| format | Article |
| id | doaj.art-db7c30a4bca1433f8fb2a663103b5eec |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-10T18:43:59Z |
| publishDate | 2020-07-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-db7c30a4bca1433f8fb2a663103b5eec2023-11-20T05:40:31ZengMDPI AGRisks2227-90912020-07-01837310.3390/risks8030073Neural Network Pricing of American Put OptionsRaquel M. Gaspar0Sara D. Lopes1Bernardo Sequeira2ISEG, Universidade de Lisboa, Rua do Quelhas 6, 1200-078 Lisbon, PortugalISEG, Universidade de Lisboa, Rua do Quelhas 6, 1200-078 Lisbon, PortugalISEG, Universidade de Lisboa, Rua do Quelhas 6, 1200-078 Lisbon, PortugalIn this study, we use Neural Networks (NNs) to price American put options. We propose two NN models—a simple one and a more complex one—and we discuss the performance of two NN models with the Least-Squares Monte Carlo (LSM) method. This study relies on American put option market prices, for four large U.S. companies—Procter and Gamble Company (PG), Coca-Cola Company (KO), General Motors (GM), and Bank of America Corp (BAC). Our dataset is composed of all options traded within the period December 2018 until March 2019. Although on average, both NN models perform better than LSM, the simpler model (NN Model 1) performs quite close to LSM. Moreover, the second NN model substantially outperforms the other models, having an RMSE ca. 40% lower than the presented by LSM. The lower RMSE is consistent across all companies, strike levels, and maturities. In summary, all methods present a good accuracy; however, after calibration, NNs produce better results in terms of both execution time and Root Mean Squared Error (RMSE).https://www.mdpi.com/2227-9091/8/3/73machine learningneural networksAmerican put optionsleast-squares Monte Carlo |
| spellingShingle | Raquel M. Gaspar Sara D. Lopes Bernardo Sequeira Neural Network Pricing of American Put Options Risks machine learning neural networks American put options least-squares Monte Carlo |
| title | Neural Network Pricing of American Put Options |
| title_full | Neural Network Pricing of American Put Options |
| title_fullStr | Neural Network Pricing of American Put Options |
| title_full_unstemmed | Neural Network Pricing of American Put Options |
| title_short | Neural Network Pricing of American Put Options |
| title_sort | neural network pricing of american put options |
| topic | machine learning neural networks American put options least-squares Monte Carlo |
| url | https://www.mdpi.com/2227-9091/8/3/73 |
| work_keys_str_mv | AT raquelmgaspar neuralnetworkpricingofamericanputoptions AT saradlopes neuralnetworkpricingofamericanputoptions AT bernardosequeira neuralnetworkpricingofamericanputoptions |