Learning short-option valuation in the presence of rare events
We present a neural-network valuation of financial derivatives in the case of fat-tailed underlying asset returns. A two-layer perceptron is trained on simulated prices taking into account the well-known effect of volatility smile. The prices of the underlier are generated using fractional calculus algorithms, and option prices are computed by means of the Bouchaud-Potters formula. This learning scheme is tested on market data; the results show a very good agreement between perceptron option prices and real market ones.
|Date of creation:||Jan 2000|
|Publication status:||Published in International Journal of Theoretical and Applied Finance 3, 563-564 (2000)|
|Contact details of provider:|| Web page: http://arxiv.org/|
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