Option pricing with modular neural networks.
This paper investigates a nonparametric modular neural network (MNN) model to price the S&P-500 European call options. The modules are based on time to maturity and moneyness of the options. The option price function of interest is homogeneous of degree one with respect to the underlying index price and the strike price. When compared to an array of parametric and nonparametric models, the MNN method consistently exerts superior out-of-sample pricing performance. We conclude that modularity improves the generalization properties of standard feedforward neural network option pricing models (with and without the homogeneity hint).
Gradojevic
Nikola
N
Faculty of Business Administration, Lakehead University, Thunder Bay, ON, Canada. ngradoje@lakeheadu.ca
Gençay
Ramazan
R
Kukolj
Dragan
D