Faculty

Engineering

Supervisor Name

Lars Stentoft

Keywords

Option Pricing Theory, Neural Network, CNN-LSTM

Description

The modern derivatives market has been steadily growing since the development of the first accurate option pricing model by Fischer Black, Robert Merton, and Myron Scholes. Since then, there have been many different approaches to more accurately price options like the binomial option pricing model and approaches using technology such as machine learning. There are many different research papers on option pricing with artificial neural networks (“ANN”) but not many with other neural network types. We contribute to the existing literature by developing a convolutional neural network – long short-term memory (“CNN-LSTM”) model to price options and compare it to an ANN model. The results from this paper show that the CNN-LSTM model performed much better than the ANN model for pricing options. It is proposed that the model is improved to reach a greater accuracy when predicting option prices.

Creative Commons License

Creative Commons Attribution-Noncommercial 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 4.0 License.

Document Type

Paper

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CNN-LSTM vs ANN: Option Pricing Theory

The modern derivatives market has been steadily growing since the development of the first accurate option pricing model by Fischer Black, Robert Merton, and Myron Scholes. Since then, there have been many different approaches to more accurately price options like the binomial option pricing model and approaches using technology such as machine learning. There are many different research papers on option pricing with artificial neural networks (“ANN”) but not many with other neural network types. We contribute to the existing literature by developing a convolutional neural network – long short-term memory (“CNN-LSTM”) model to price options and compare it to an ANN model. The results from this paper show that the CNN-LSTM model performed much better than the ANN model for pricing options. It is proposed that the model is improved to reach a greater accuracy when predicting option prices.

 

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