We consider asset price models whose dynamics are described by linear functions of the (time extended) signature of a primary underlying process, which can range from a (market-inferred) Brownian motion to a general multidimensional continuous semimartingale. The framework is universal in the sense that classical models can be approximated arbitrarily well and that the model’s parameters can be learned from all sources of available data by simple methods. We provide conditions guaranteeing absence of arbitrage as well as tractable option pricing formulas for so-called sig-payoffs, exploiting the polynomial nature of generic primary processes. One of our main focus lies on calibration, where we consider both time-series and implied volatility surface data, generated from classical stochastic volatility models and also from S&P 500 index market data. For both tasks the linearity of the model turns out to be the crucial tractability feature which allows to get fast and accurate calibrations results.

Signature-based models: theory and calibration

Christa Cuchiero;Sara Svaluto-Ferro
2022-01-01

Abstract

We consider asset price models whose dynamics are described by linear functions of the (time extended) signature of a primary underlying process, which can range from a (market-inferred) Brownian motion to a general multidimensional continuous semimartingale. The framework is universal in the sense that classical models can be approximated arbitrarily well and that the model’s parameters can be learned from all sources of available data by simple methods. We provide conditions guaranteeing absence of arbitrage as well as tractable option pricing formulas for so-called sig-payoffs, exploiting the polynomial nature of generic primary processes. One of our main focus lies on calibration, where we consider both time-series and implied volatility surface data, generated from classical stochastic volatility models and also from S&P 500 index market data. For both tasks the linearity of the model turns out to be the crucial tractability feature which allows to get fast and accurate calibrations results.
signature methods
calibration of financial models
Monte Carlo methods
linear (infinite dimensional) systems
polynomial processes
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11562/1081991
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