arXiv subjects
Publications and source records attributed to Brian Huge.
We extend the scope of differential machine learning and introduce a new breed of supervised principal component analysis to reduce dimensionality of Derivatives problems. Applications include the specification and calibration of pricing models, the identification of regression features in least-square Monte-Carlo, and the pre-processing of simulated datasets for (differential) machine learning.
Differential machine learning combines automatic adjoint differentiation (AAD) with modern machine learning (ML) in the context of risk management of financial Derivatives. We introduce novel algorithms for training fast, accurate pricing and risk approximations, online, in real-time, with convergence guarantees. Our machinery is applicable to arbitrary Derivatives instruments or trading books, under arbitrary stochastic models of the underlying market variables. It effectively resolves computational bottlenecks of Derivatives risk reports and capital calculations. Differential ML is a general extension of supervised learning, where ML models are trained on examples of not only inputs and labels but also differentials of labels wrt inputs. It is also applicable in many situations outside finance, where high quality first-order derivatives wrt training inputs are available. Applications in Physics, for example, may leverage differentials known from first principles to learn function approximations more effectively. In finance, AAD computes pathwise differentials with remarkable efficacy so differential ML algorithms provide extremely effective pricing and risk approximations. We can produce fast analytics in models too complex for closed form solutions, extract the risk factors of complex transactions and trading books, and effectively compute risk management metrics like reports across a large number of scenarios, backtesting and simulation of hedge strategies, or regulations like XVA, CCR, FRTB or SIMM-MVA. TensorFlow implementation is available on https://github.com/differential-machine-learning