Paper ID: 2407.21138

Enhancing Deep Hedging of Options with Implied Volatility Surface Feedback Information

Pascal François, Geneviève Gauthier, Frédéric Godin, Carlos Octavio Pérez Mendoza

We present a dynamic hedging scheme for S&P 500 options, where rebalancing decisions are enhanced by integrating information about the implied volatility surface dynamics. The optimal hedging strategy is obtained through a deep policy gradient-type reinforcement learning algorithm, with a novel hybrid neural network architecture improving the training performance. The favorable inclusion of forward-looking information embedded in the volatility surface allows our procedure to outperform several conventional benchmarks such as practitioner and smiled-implied delta hedging procedures, both in simulation and backtesting experiments.

Submitted: Jul 30, 2024