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Nonparametric pricing and hedging of exotic derivatives

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arxiv 1905.00711 v1 pith:P7RFHPQZ submitted 2019-05-02 q-fin.MF

classification q-fin.MF
keywords derivativesexoticpayoffsfinancialhedgingmarketpriceprices
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In the spirit of Arrow-Debreu, we introduce a family of financial derivatives that act as primitive securities in that exotic derivatives can be approximated by their linear combinations. We call these financial derivatives signature payoffs. We show that signature payoffs can be used to nonparametrically price and hedge exotic derivatives in the scenario where one has access to price data for other exotic payoffs. The methodology leads to a computationally tractable and accurate algorithm for pricing and hedging using market prices of a basket of exotic derivatives that has been tested on real and simulated market prices, obtaining good results.

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  1. Rough kernel hedging

    math.FA 2025-01 conditional novelty 6.0 of 10

    A signature-kernel and operator-valued-kernel framework for hedging is proved to have a unique global minimizer with an explicit formula, and it approximates the delta hedge on a GBM example.

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