02421cam a22003137 4500001000600000003000500006005001700011006001900028007001500047008004100062100002500103245015100128260006600279300005700345490004100402500001600443520113500459530006001594538007201654538003601726588002501762690009101787700001801878700002001896710004201916830007601958856003702034856003602071w4718NBER20200704194645.0m o d cr cnu||||||||200704s1994 mau fo 000 0 eng d1 aHutchinson, James M.12aA Nonparametric Approach to Pricing and Hedging Derivative Securities Via Learning Networks /cJames M. Hutchinson, Andrew W. Lo, Tomaso Poggio. aCambridge, Mass.bNational Bureau of Economic Researchc1994. a1 online resource:billustrations (black and white);1 aNBER working paper seriesvno. w4718 aApril 1994.3 aWe propose a nonparametric method for estimating the pricing formula of a derivative asset using learning networks. Although not a substitute for the more traditional arbitrage-based pricing formulas, network pricing formulas may be more accurate and computationally more efficient alternatives when the underlying asset's price dynamics are unknown, or when the pricing equation associated with no-arbitrage condition cannot be solved analytically. To assess the potential value of network pricing formulas, we simulate Black-Scholes option prices and show that learning networks can recover the Black-Scholes formula from a two-year training set of daily options prices, and that the resulting network formula can be used successfully to both price and delta-hedge options out-of-sample. For comparison, we estimate models using four popular methods: ordinary least squares, radial basis function networks, multilayer perceptron networks, and projection pursuit. To illustrate the practical relevance of our network pricing approach, we apply it to the pricing and delta-hedging of S&P 500 futures options from 1987 to 1991. aHardcopy version available to institutional subscribers aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.0 aPrint version record 7aG13 - Contingent Pricing • Futures Pricing2Journal of Economic Literature class.1 aLo, Andrew W.1 aPoggio, Tomaso.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w4718.40uhttp://www.nber.org/papers/w471840uhttp://dx.doi.org/10.3386/w4718