A machine learning approach to portfolio pricing and risk management for high-dimensional problems

Lucio Fernandez-Arjona; Damir Filipović

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arXiv · 2004.14149

A machine learning approach to portfolio pricing and risk management for high-dimensional problems

Lucio Fernandez-Arjona·Damir Filipović

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Abstract

We present a general framework for portfolio risk management in discrete time, based on a replicating martingale. This martingale is learned from a finite sample in a supervised setting. The model learns the features necessary for an effective low-dimensional representation, overcoming the curse of dimensionality common to function approximation in high-dimensional spaces. We show results based on polynomial and neural network bases. Both offer superior results to naive Monte Carlo methods and other existing methods like least-squares Monte Carlo and replicating portfolios.

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Lucio Fernandez-Arjona, Damir Filipović. 2020-04-29. A machine learning approach to portfolio pricing and risk management for high-dimensional problems. https://arxiv.org/abs/2004.14149

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