Deep Learning Volatility

Abstract

We present a neural network based calibration method that performs the calibration task within a few milliseconds for the full implied volatility surface. The framework is consistently applicable throughout a range of volatility models—including second generation stochastic volatility models and the rough volatility family—and a range of derivative contracts. Neural networks in this work are used in an off-line approximation of complex pricing functions, which are difficult to represent or time-consuming to evaluate by other means. The form in which information from available data is extracted and used influences network performance: The grid-based algorithm used for calibration, inspired by representing the implied volatility and option prices as a collection of pixels is extended to include models where the initial forward variance curve is an input. We highlight how this perspective opens new horizons for quantitative modelling. The calibration bottleneck posed by a slow pricing of derivative contracts is lifted, and stochastic volatility models (classical and rough) can be handled in great generality. We demonstrate the calibration performance both on simulated and historical data, on different derivative contracts and on a number of examples models of increasing complexity, and also showcase some of the potentials of this approach towards model recognition. The algorithm and examples are provided in the Github repository GitHub: NN-StochVol-Calibrations.