Long-memory stochastic volatility model calibration using deep neural nets

Widespread use of stochastic volatility models in the financial industry is bottlenecked by the complexity and intractability they present. Since the seminal work in quantitative finance by Black et al. and Merton, the infamous Black-Scholes model has been extensively used in the industry for vanilla and exotic option pricing. Although the model assumes constant volatility which is not observed in the market, the widespread use is sustained due to its closed-form solution for European vanilla option. However, with the advent of neural networks, stochastic volatility models are becoming increasing tractable. The use of neural networks to learn the expectation function of the underlying stochastic volatility processes for calibration makes application of these more involved stochastic volatility models in the industrial settings practical. This thesis extends this application of neural networks to the calibration of long-memory stochastic volatility (LMSV) models, a class of stochastic volatility models characterized by fractional Brownian motion. The specific challenge with these long-memory models is that they are non-Markovian in nature and simulation can be time-consuming and costly. We show that by using neural networks we can capture these non-Markovian characteristics and quickly calibrate them to ever-evolving market conditions despite their high computational cost.

Name thesis:degree_name

M.S.

Level thesis:degree_level

Thesis

Discipline thesis:degree_discipline

Electrical & Computer Engr

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2021

Author dc:creator

• Masroor, Ahnaf

Contributors dc:contributor

• Chronopoulou, Alexandra
• Milenkovic, Olgica

• stochastic volatility models
• neural network applications
• fast calibration
• long-memory models
• Heston model
• European option pricing
• volatility model calibration

Statement dc:rights

• Copyright 2021 Ahnaf Masroor

Language dc:language

en

Handle dc:identifier

http://hdl.handle.net/2142/110614

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/110614