Option valuation based on the neural regression model

摘要

In this article, a neural regression (NR) model, which produces nonlinear coefficients of multiple regression model based on neural networks, is introduced to capture the option valuation’s nonlinear characteristics effectively. The traditional linear regression uses the least-squares estimator to estimate the coefficient of a linear regression and thus may only produce suboptimal solutions. However, Applying neural networks to forecast volatility in option pricing has increased in popularity in recent years since many studies have indicated that the conventional option pricing models are not accurate enough. Our proposed neural regression model devotes to evaluate option values to improve on the tracking error in the measurement of hedging capability. The NR model uses the variables introduced by the Black–Scholes Model and applies the multiple regressions (MR) model to re-price option values. It is worth noting that each corresponding weight coefficient in MR is constructed by a complete neural network rather than by a scalar value. By capturing the nonlinear behaviors of option pricing, our proposed NR model has lower tracking error and better hedging capability than the BS model and other studies.