Deep learning volatility: a deep neural network perspective on pricing and calibration in (rough) volatility models

We present a neural network-based calibration method that performs the calibration task within a few milliseconds for the full implied volatility surface. The framework is consistently applicable throughout a range of volatility models-including second-generation stochastic volatility models and the...

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Bibliographic Details
Published in:Quantitative finance 2021, Vol.21 (1), p.11-27
Main Authors: Horvath, Blanka, Muguruza, Aitor, Tomas, Mehdi
Format: Article
Language:English
Subjects:
Accurate price approximation
Calibration
Deep learning
Machine learning
Model assessment
Monte Carlo
Neural networks
Rough volatility
Securities prices
Volatility
Volatility modelling
Volterra process
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Summary:We present a neural network-based calibration method that performs the calibration task within a few milliseconds for the full implied volatility surface. The framework is consistently applicable throughout a range of volatility models-including second-generation stochastic volatility models and the rough volatility family-and a range of derivative contracts. Neural networks in this work are used in an off-line approximation of complex pricing functions, which are difficult to represent or time-consuming to evaluate by other means. The form in which information from available data is extracted and used influences network performance: The grid-based algorithm used for calibration is inspired by representing the implied volatility and option prices as a collection of pixels. We highlight how this perspective opens new horizons for quantitative modelling. The calibration bottleneck posed by a slow pricing of derivative contracts is lifted, and stochastic volatility models (classical and rough) can be handled in great generality as the framework also allows taking the forward variance curve as an input. We demonstrate the calibration performance both on simulated and historical data, on different derivative contracts and on a number of example models of increasing complexity, and also showcase some of the potentials of this approach towards model recognition. The algorithm and examples are provided in the Github repository GitHub: NN-StochVol-Calibrations.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697688.2020.1817974