Open access
Date
2024-03Type
- Journal Article
ETH Bibliography
yes
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Abstract
This paper presents the benefits of using randomized neural networks instead of standard basis functions or deep neural networks to approximate the solutions of optimal stopping problems. The key idea is to use neural networks, where the parameters of the hidden layers are generated randomly, and only the last layer is trained, in order to approximate the continuation value. Our approaches are applicable to high dimensional problems where the existing approaches become increasingly impractical. In addition, since our approaches can be optimized using simple linear regression, they are easy to implement, and theoretical guarantees can be provided. We test our approaches for American option pricing on Black–Scholes, Heston and rough Heston models and for optimally stopping fractional Brownian motion. In all cases, our algorithms outperform the state-of-the-art and other relevant machine learning approaches in terms of computation time while achieving comparable results. Moreover, we show that they can also be used to efficiently compute Greeks of American options. Show more
Permanent link
https://doi.org/10.3929/ethz-b-000666150Publication status
publishedExternal links
Journal / series
Frontiers of Mathematical FinanceVolume
Pages / Article No.
Publisher
American Institute of Mathematical SciencesSubject
Optimal stopping; American option pricing; least squares Monte Carlo; reinforcement learning; randomized neural networks; reservoir computing; Greeks of American optionsFunding
179114 - Mathematical Finance in the light of machine learning (SNF)
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ETH Bibliography
yes
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