Is the difference between deep hedging and delta hedging a statistical arbitrage?

2024/07/20 by Pascal François, François, Pascal, Geneviève Gauthier +5 · 3 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #FOS: Economics and business #Market Dynamics and Volatility #Risk Management (q-fin.RM) #Risk Management in Financial Firms

paper · pdf · doi:10.48550/arxiv.2407.14736

openalex publication_date 2024/07/20 · openalex created_date 2024/09/14 · openalex updated_date 2026/07/28

Abstract

The recent work of Horikawa and Nakagawa (2024) claims that under a complete market admitting statistical arbitrage, the difference between the hedging position provided by deep hedging and that of the replicating portfolio is a statistical arbitrage. This raises concerns as it entails that deep hedging can include a speculative component aimed simply at exploiting the structure of the risk measure guiding the hedging optimisation problem. We test whether such finding remains true in a GARCH-based market model, which is an illustrative case departing from complete market dynamics. We observe that the difference between deep hedging and delta hedging is a speculative overlay if the risk measure considered does not put sufficient relative weight on adverse outcomes. Nevertheless, a suitable choice of risk measure can prevent the deep hedging agent from engaging in speculation.

Cited by

• Robust Hedging Valuation Adjustment for Deep Hedging Policies under Market Frictions
• Application of Deep Reinforcement Learning to At-the-Money S&P 500 Options Hedging
• Statistical Arbitrage in Options Markets by Graph Learning and Synthetic Long Positions

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