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Y. Yang, Y. Zheng, T.M. Hospedales: Gated Neural Networks for Option Pricing: Rationality by Design

November 30, 2016

We propose a neural network approach to price EU call options that significantly outperforms some existing pricing models and comes with guarantees that its predictions are economically reasonable. To achieve this, we introduce a class of gated neural networks that automatically learn to divide-and-conquer the problem space for robust and accurate pricing. We then derive instantiations of these networks that are ‘rational by design’ in terms of naturally encoding a valid call option surface that enforces no arbitrage principles.

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