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Optimal Stopping via Randomized Neural Networks

Author

Listed:
  • Calypso Herrera
  • Florian Krach
  • Pierre Ruyssen
  • Josef Teichmann

Abstract

This paper presents the benefits of using randomized neural networks instead of standard basis functions or deep neural networks to approximate the solutions of optimal stopping problems. The key idea is to use neural networks, where the parameters of the hidden layers are generated randomly and only the last layer is trained, in order to approximate the continuation value. Our approaches are applicable to high dimensional problems where the existing approaches become increasingly impractical. In addition, since our approaches can be optimized using simple linear regression, they are easy to implement and theoretical guarantees can be provided. We test our approaches for American option pricing on Black--Scholes, Heston and rough Heston models and for optimally stopping a fractional Brownian motion. In all cases, our algorithms outperform the state-of-the-art and other relevant machine learning approaches in terms of computation time while achieving comparable results. Moreover, we show that they can also be used to efficiently compute Greeks of American options.

Suggested Citation

  • Calypso Herrera & Florian Krach & Pierre Ruyssen & Josef Teichmann, 2021. "Optimal Stopping via Randomized Neural Networks," Papers 2104.13669, arXiv.org, revised Dec 2023.
  • Handle: RePEc:arx:papers:2104.13669
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    References listed on IDEAS

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    Cited by:

    1. Zhengqing Zhou & Guanyang Wang & Jose Blanchet & Peter W. Glynn, 2021. "Unbiased Optimal Stopping via the MUSE," Papers 2106.02263, arXiv.org, revised Dec 2022.
    2. Xuwei Yang & Anastasis Kratsios & Florian Krach & Matheus Grasselli & Aurelien Lucchi, 2023. "Regret-Optimal Federated Transfer Learning for Kernel Regression with Applications in American Option Pricing," Papers 2309.04557, arXiv.org.
    3. Beatrice Acciaio & Anastasis Kratsios & Gudmund Pammer, 2022. "Designing Universal Causal Deep Learning Models: The Geometric (Hyper)Transformer," Papers 2201.13094, arXiv.org, revised Mar 2023.

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