English

Optimal stopping with signatures

Probability 2021-05-04 v1 Computational Finance

Abstract

We propose a new method for solving optimal stopping problems (such as American option pricing in finance) under minimal assumptions on the underlying stochastic process XX. We consider classic and randomized stopping times represented by linear and non-linear functionals of the rough path signature X<\mathbb{X}^{<\infty} associated to XX, and prove that maximizing over these classes of signature stopping times, in fact, solves the original optimal stopping problem. Using the algebraic properties of the signature, we can then recast the problem as a (deterministic) optimization problem depending only on the (truncated) expected signature E[X0,TN]\mathbb{E}\left[ \mathbb{X}^{\le N}_{0,T} \right]. By applying a deep neural network approach to approximate the non-linear signature functionals, we can efficiently solve the optimal stopping problem numerically. The only assumption on the process XX is that it is a continuous (geometric) random rough path. Hence, the theory encompasses processes such as fractional Brownian motion, which fail to be either semi-martingales or Markov processes, and can be used, in particular, for American-type option pricing in fractional models, e.g. on financial or electricity markets.

Keywords

Cite

@article{arxiv.2105.00778,
  title  = {Optimal stopping with signatures},
  author = {Christian Bayer and Paul Hager and Sebastian Riedel and John Schoenmakers},
  journal= {arXiv preprint arXiv:2105.00778},
  year   = {2021}
}

Comments

39 pages, 1 figure

R2 v1 2026-06-24T01:43:39.506Z