Incorporating Second-Order Functional Knowledge for Better Option Pricing

Neural Information Processing Systems

Incorporating prior knowledge of a particular task into the architecture of a learning algorithm can greatly improve generalization performance. We study here a case where we know that the function to be learned is non-decreasing in two of its arguments and convex in one of them. For this purpose we propose a class of functions similar to multi-layer neural networks but (1) that has those properties, (2) is a universal approximator of continuous functions with these and other properties. We apply this new class of functions to the task of modeling the price of call options. Experiments show improvements on regressing the price of call options using the new types of function classes that incorporate the a priori constraints. 1 Introduction Incorporating a priori knowledge of a particular task into a learning algorithm helps reducing thenecessary complexity of the learner and generally improves performance, if the incorporated knowledge is relevant to the task and really corresponds to the generating process ofthe data. In this paper we consider prior knowledge on the positivity of some first and second derivatives of the function to be learned. In particular such constraints have applications to modeling the price of European stock options. Based on the Black-Scholes formula, the price of a call stock option is monotonically increasing in both the "moneyness" andtime to maturity of the option, and it is convex in the "moneyness". Section 3 better explains these terms and stock options.


Unsupervised learning for anomaly detection in stock options pricing

#artificialintelligence

Note: This post is part of a broader work for predicting stock prices. The outcome (identified anomaly) is a feature (input) in a LSTM model (within a GAN architecture)- link to the post. Options valuation is a very difficult task. To begin with, it entails using a lot of data points (some are listed below) and some of them are quite subjective (such as the implied volatility -- see below) and difficult to calculate precisely. As an example let us check the calculation for the call's Theta -- θ: Another example of how difficult options pricing is, is the Black-Scholes formula which is used for calculating the options prices themselves.


A Survey of Possible Uses of Quantum Mechanical Concepts in Financial Economics

AAAI Conferences

In this talk we intend to provide for an overview of the uses we can make in financial economics of several quantum physical concepts. We introduce and briefly discuss the so called information wave function. We discuss how the information wave function can be of use in financial option pricing. We then briefly allude on how the information wave function can be used in arbitrage. We briefly discuss how the information wave concept can be connected to measures of information. We round off the paper on recent work we are doing with Andrei Khrennikov on i) testing probability interference in psychology (Khrennikov and Haven 2006 (I)) and ii) finding uses of'financial' nonlocality and entanglement (Khrennikov and Haven 2006 (II)). In summary this talk addresses interference (probability interference), financial entanglement and looks at using the wave function in a variety of ways within an economics/finance - political science - social interaction environment.


How to Hedge an Option Against an Adversary: Black-Scholes Pricing is Minimax Optimal

Neural Information Processing Systems

We consider a popular problem in finance, option pricing, through the lens of an online learning game between Nature and an Investor. In the Black-Scholes option pricing model from 1973, the Investor can continuously hedge the risk of an option by trading the underlying asset, assuming that the asset's price fluctuates according to Geometric Brownian Motion (GBM). We consider a worst-case model, in which Nature chooses a sequence of price fluctuations under a cumulative quadratic volatility constraint, and the Investor can make a sequence of hedging decisions. Our main result is to show that the value of our proposed game, which is the regret'' of hedging strategy, converges to the Black-Scholes option price. We use significantly weaker assumptions than previous work---for instance, we allow large jumps in the asset price---and show that the Black-Scholes hedging strategy is near-optimal for the Investor even in this non-stochastic framework."


Galaxy S8 Leak Reveals Samsung's Expensive Secrets

Forbes - Tech

Opinions expressed by Forbes Contributors are their own. The author is a Forbes contributor. The opinions expressed are those of the writer. Optimists will call it bad timing, cynics will label it "Monkey see, monkey do," but either way Samsung looks set to copy the worst feature of the radically redesigned iPhone 8... According to a new report from SamMobile, Samsung is going to match Apple's planned price rises which will see both the Galaxy S8 and iPhone 8 retail for more than $1,000.