Application of Tensor Neural Networks to Pricing Bermudan Swaptions
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| Autores principales: | , , , , , , , , , , , , , , |
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| Formato: | Preprint |
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2023
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| author | Patel, Raj G. Dominguez, Tomas Dib, Mohammad Palmer, Samuel Cadarso, Andrea Contreras, Fernando De Lope Ratnani, Abdelkader Casanova, Francisco Gomez Hernández-Santana, Senaida Díaz-Fernández, Álvaro Andrés, Eva Luis-Hita, Jorge Sánchez-Martínez, Escolástico Mugel, Samuel Orus, Roman |
| author_facet | Patel, Raj G. Dominguez, Tomas Dib, Mohammad Palmer, Samuel Cadarso, Andrea Contreras, Fernando De Lope Ratnani, Abdelkader Casanova, Francisco Gomez Hernández-Santana, Senaida Díaz-Fernández, Álvaro Andrés, Eva Luis-Hita, Jorge Sánchez-Martínez, Escolástico Mugel, Samuel Orus, Roman |
| contents | The Cheyette model is a quasi-Gaussian volatility interest rate model widely used to price interest rate derivatives such as European and Bermudan Swaptions for which Monte Carlo simulation has become the industry standard. In low dimensions, these approaches provide accurate and robust prices for European Swaptions but, even in this computationally simple setting, they are known to underestimate the value of Bermudan Swaptions when using the state variables as regressors. This is mainly due to the use of a finite number of predetermined basis functions in the regression. Moreover, in high-dimensional settings, these approaches succumb to the Curse of Dimensionality. To address these issues, Deep-learning techniques have been used to solve the backward Stochastic Differential Equation associated with the value process for European and Bermudan Swaptions; however, these methods are constrained by training time and memory. To overcome these limitations, we propose leveraging Tensor Neural Networks as they can provide significant parameter savings while attaining the same accuracy as classical Dense Neural Networks. In this paper we rigorously benchmark the performance of Tensor Neural Networks and Dense Neural Networks for pricing European and Bermudan Swaptions, and we show that Tensor Neural Networks can be trained faster than Dense Neural Networks and provide more accurate and robust prices than their Dense counterparts. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2304_09750 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | Application of Tensor Neural Networks to Pricing Bermudan Swaptions Patel, Raj G. Dominguez, Tomas Dib, Mohammad Palmer, Samuel Cadarso, Andrea Contreras, Fernando De Lope Ratnani, Abdelkader Casanova, Francisco Gomez Hernández-Santana, Senaida Díaz-Fernández, Álvaro Andrés, Eva Luis-Hita, Jorge Sánchez-Martínez, Escolástico Mugel, Samuel Orus, Roman Computational Finance Computational Engineering, Finance, and Science Machine Learning Quantum Physics The Cheyette model is a quasi-Gaussian volatility interest rate model widely used to price interest rate derivatives such as European and Bermudan Swaptions for which Monte Carlo simulation has become the industry standard. In low dimensions, these approaches provide accurate and robust prices for European Swaptions but, even in this computationally simple setting, they are known to underestimate the value of Bermudan Swaptions when using the state variables as regressors. This is mainly due to the use of a finite number of predetermined basis functions in the regression. Moreover, in high-dimensional settings, these approaches succumb to the Curse of Dimensionality. To address these issues, Deep-learning techniques have been used to solve the backward Stochastic Differential Equation associated with the value process for European and Bermudan Swaptions; however, these methods are constrained by training time and memory. To overcome these limitations, we propose leveraging Tensor Neural Networks as they can provide significant parameter savings while attaining the same accuracy as classical Dense Neural Networks. In this paper we rigorously benchmark the performance of Tensor Neural Networks and Dense Neural Networks for pricing European and Bermudan Swaptions, and we show that Tensor Neural Networks can be trained faster than Dense Neural Networks and provide more accurate and robust prices than their Dense counterparts. |
| title | Application of Tensor Neural Networks to Pricing Bermudan Swaptions |
| topic | Computational Finance Computational Engineering, Finance, and Science Machine Learning Quantum Physics |
| url | https://arxiv.org/abs/2304.09750 |