Is the difference between deep hedging and delta hedging a statistical arbitrage?
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arXiv
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| Main Authors: | , , , |
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| Format: | Preprint |
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2024
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| _version_ | 1866910659416948736 |
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| author | François, Pascal Gauthier, Geneviève Godin, Frédéric Mendoza, Carlos Octavio Pérez |
| author_facet | François, Pascal Gauthier, Geneviève Godin, Frédéric Mendoza, Carlos Octavio Pérez |
| contents | The recent work of Horikawa and Nakagawa (2024) claims that under a complete market admitting statistical arbitrage, the difference between the hedging position provided by deep hedging and that of the replicating portfolio is a statistical arbitrage. This raises concerns as it entails that deep hedging can include a speculative component aimed simply at exploiting the structure of the risk measure guiding the hedging optimisation problem. We test whether such finding remains true in a GARCH-based market model, which is an illustrative case departing from complete market dynamics. We observe that the difference between deep hedging and delta hedging is a speculative overlay if the risk measure considered does not put sufficient relative weight on adverse outcomes. Nevertheless, a suitable choice of risk measure can prevent the deep hedging agent from engaging in speculation. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2407_14736 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Is the difference between deep hedging and delta hedging a statistical arbitrage? François, Pascal Gauthier, Geneviève Godin, Frédéric Mendoza, Carlos Octavio Pérez Computational Finance Risk Management The recent work of Horikawa and Nakagawa (2024) claims that under a complete market admitting statistical arbitrage, the difference between the hedging position provided by deep hedging and that of the replicating portfolio is a statistical arbitrage. This raises concerns as it entails that deep hedging can include a speculative component aimed simply at exploiting the structure of the risk measure guiding the hedging optimisation problem. We test whether such finding remains true in a GARCH-based market model, which is an illustrative case departing from complete market dynamics. We observe that the difference between deep hedging and delta hedging is a speculative overlay if the risk measure considered does not put sufficient relative weight on adverse outcomes. Nevertheless, a suitable choice of risk measure can prevent the deep hedging agent from engaging in speculation. |
| title | Is the difference between deep hedging and delta hedging a statistical arbitrage? |
| topic | Computational Finance Risk Management |
| url | https://arxiv.org/abs/2407.14736 |