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arXiv · 2111.07844

Deep Hedging: Learning to Remove the Drift under Trading Frictions with Minimal Equivalent Near-Martingale Measures

Hans Buehler·Phillip Murray·Mikko S. Pakkanen·Ben Wood
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Abstract

We present a machine learning approach for finding minimal equivalent martingale measures for markets simulators of tradable instruments, e.g. for a spot price and options written on the same underlying. We extend our results to markets with frictions, in which case we find "near-martingale measures" under which the prices of hedging instruments are martingales within their bid/ask spread. By removing the drift, we are then able to learn using Deep Hedging a "clean" hedge for an exotic payoff which is not polluted by the trading strategy trying to make money from statistical arbitrage opportunities. We correspondingly highlight the robustness of this hedge vs estimation error of the original market simulator. We discuss applications to two market simulators.

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Hans Buehler, Phillip Murray, Mikko S. Pakkanen, Ben Wood. 2021-11-15. Deep Hedging: Learning to Remove the Drift under Trading Frictions with Minimal Equivalent Near-Martingale Measures. https://arxiv.org/abs/2111.07844

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