Estimating risks of European option books using neural-SDE market models
In this paper we examine the capacity of arbitrage-free neural stochastic differential equation market models to produce realistic scenarios for the joint dynamics of multiple European options on a single underlying. We subsequently demonstrate their use as a risk simulation engine for option portfo...
| Main Authors: | , , |
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| Format: | Journal article |
| Language: | English |
| Published: |
Infopro Digital Services
2023
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| Summary: | In this paper we examine the capacity of arbitrage-free neural stochastic differential equation market models to produce realistic scenarios for the joint dynamics of multiple European options on a single underlying. We subsequently demonstrate their use as a risk simulation engine for option portfolios. Through backtesting analysis we show that our models are more computationally efficient and accurate for evaluating the value-at-risk of option portfolios than standard filtered historical simulation approaches, with better coverage and less procyclicality. |
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