Paper: arXiv 2510.01446

Authors: Georgy Milyushkov

Abstract

This study investigates the application of machine learning techniques, specifically Neural Networks, Random Forests, and CatBoost for option pricing, in comparison to traditional models such as Black-Scholes and Heston Model. Using both synthetically generated data and real market option data, each model is evaluated in predicting the option price. The results show that machine learning models can capture complex, non-linear relationships in option prices and, in several cases, outperform both Black-Scholes and Heston models. These findings highlight the potential of data-driven methods to improve pricing accuracy and better reflect market dynamics.

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs advanced stochastic calculus (Itô’s Lemma, coupled SDEs) and numerical methods (semi-analytical solutions, characteristic functions), yet it also demonstrates strong empirical rigor through synthetic and real market data, model implementation (Python/QuantLib), GitHub code availability, and standard error metrics.

Research Flowchart

  flowchart TD
  A["Research Goal<br>Can ML Outperform Traditional<br>Option Pricing Models?"] --> B["Methodology<br>Compare ML vs. Black-Scholes & Heston"]
  B --> C{"Data Sources"}
  C --> D["Synthetic Data"]
  C --> E["Real Market Data"]
  D --> F["Computation<br>Train Neural Networks, Random Forests, CatBoost"]
  E --> F
  F --> G["Analysis<br>Evaluate Prediction Accuracy"]
  G --> H["Key Findings<br>ML models capture non-linear relationships<br>ML often outperforms traditional models"]

Cited References (10)

  1. The Pricing of Options and Corporate Liabilities (1973)
  2. A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options (1993) — link
  3. Option pricing when underlying stock returns are discontinuous (1976) — link
  4. A Nonparametric Approach to Pricing and Hedging Derivative Securities Via Learning Networks (1994)
  5. Machine learning for option pricing: an empirical investigation of network architectures (2023) — link
  6. Machine learning for pricing American options in high-dimensional Markovian and non-Markovian models (2020) — link
  7. American Option Pricing using Self-Attention GRU and Shapley Value Interpretation (2023) — link
  8. The Shape and Term Structure of the Index Option Smirk: Why Multifactor Stochastic Volatility Models Work So Well (2009) — link
and 2 more
  1. The Volatility Surface (2006) — link
  2. Not-so-complex logarithms in the Heston model (2006) — link

0 of 10 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.