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R. Cont, and M. Vuletić: Data – Driven Hedging with Generative Models

June 18, 2025

We propose a nonparametric data-driven methodology for hedging using generative models. In contrast with model-based hedging approaches relying on sensitivity analysis of model pricing functions, our approach uses a conditional generative model trained on market data to simulate realistic market scenarios given current market conditions, and computes hedge ratios which minimize risk across these scenarios. The approach incorporates transaction costs, leads to an optimal selection of hedging instruments, and adapts to market conditions. We illustrate the effectiveness of this methodology for hedging option portfolios using VolGAN, a generative model for implied volatility surfaces, and compare its performance with delta and delta-vega hedging.

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