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Deep Hedging: Continuous Reinforcement Learning for Hedging of General Portfolios across Multiple Risk Aversions

Author

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  • Phillip Murray
  • Ben Wood
  • Hans Buehler
  • Magnus Wiese
  • Mikko S. Pakkanen

Abstract

We present a method for finding optimal hedging policies for arbitrary initial portfolios and market states. We develop a novel actor-critic algorithm for solving general risk-averse stochastic control problems and use it to learn hedging strategies across multiple risk aversion levels simultaneously. We demonstrate the effectiveness of the approach with a numerical example in a stochastic volatility environment.

Suggested Citation

  • Phillip Murray & Ben Wood & Hans Buehler & Magnus Wiese & Mikko S. Pakkanen, 2022. "Deep Hedging: Continuous Reinforcement Learning for Hedging of General Portfolios across Multiple Risk Aversions," Papers 2207.07467, arXiv.org.
    • Handle: RePEc:arx:papers:2207.07467
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    References listed on IDEAS

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    1. Blanka Horvath & Josef Teichmann & Zan Zuric, 2021. "Deep Hedging under Rough Volatility," Swiss Finance Institute Research Paper Series 21-88, Swiss Finance Institute.
    2. Mark Broadie & Özgür Kaya, 2006. "Exact Simulation of Stochastic Volatility and Other Affine Jump Diffusion Processes," Operations Research, INFORMS, vol. 54(2), pages 217-231, April.
    3. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    4. Sebastian Becker & Patrick Cheridito & Arnulf Jentzen, 2020. "Pricing and Hedging American-Style Options with Deep Learning," JRFM, MDPI, vol. 13(7), pages 1-12, July.
    5. Sebastian Becker & Patrick Cheridito & Arnulf Jentzen, 2019. "Pricing and hedging American-style options with deep learning," Papers 1912.11060, arXiv.org, revised Jul 2020.
    6. Blanka Horvath & Josef Teichmann & Žan Žurič, 2021. "Deep Hedging under Rough Volatility," Risks, MDPI, vol. 9(7), pages 1-20, July.
    7. Sebastian Jaimungal, 2022. "Reinforcement learning and stochastic optimisation," Finance and Stochastics, Springer, vol. 26(1), pages 103-129, January.
    8. Blanka Horvath & Josef Teichmann & Zan Zuric, 2021. "Deep Hedging under Rough Volatility," Papers 2102.01962, arXiv.org.
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    Cited by:

    1. El Amine Cherrat & Snehal Raj & Iordanis Kerenidis & Abhishek Shekhar & Ben Wood & Jon Dee & Shouvanik Chakrabarti & Richard Chen & Dylan Herman & Shaohan Hu & Pierre Minssen & Ruslan Shaydulin & Yue , 2023. "Quantum Deep Hedging," Papers 2303.16585, arXiv.org, revised Nov 2023.
    2. Masanori Hirano & Kentaro Minami & Kentaro Imajo, 2023. "Adversarial Deep Hedging: Learning to Hedge without Price Process Modeling," Papers 2307.13217, arXiv.org.
    3. Yannick Limmer & Blanka Horvath, 2023. "Robust Hedging GANs," Papers 2307.02310, arXiv.org.

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