AA4 – Energy and Markets

Project

AA4-2

Optimal Control in Energy Markets Using Rough Analysis and Deep Networks

Project Heads

Christian Bayer, Peter Friz, John Schoenmakers, Vladimir Spokoiny

Project Members

Paul Hager (TU)

Project Duration

01.01.2019 – 31.12.2021

Located at

TU Berlin / WIAS

Description

In this project, we will develop efficient methods for modeling energy price processes and methods for solving related control or decision problems. Following (Bennedsen, M. 2017, ‘A rough multi-factor model of electricity spot prices’, Energy Economics, bind 63, s. 301-313), we explore the use of rough pricing models, which have been very successful for modeling equity markets. Due to the lacking Markov property, rough models pose new mathematical challenges for stochastic control. In this area deep learning is playing an increasingly important role. In this respect, a big challenge is the incorporation of deep learning architectures in new methods for optimal stopping, multiple stopping and control problems.

We compute solutions to these control problems by combining new methods from machine learning (reinforcement learning) with classical tools from optimal control (dynamic programming, regression methods, duality formulas).

Further, we employ methods that are based on the signature, that is the sequence consisting of iterated integrals of the underlying path – giving an efficient compression of the signal, particularly promising in non Markovian situations.

Selected Publications

  • C. Bayer, P. Friz, and J. Gatheral. Pricing under rough volatility. Quantitative Finance, 16(6):887–904, 2016.
  • D. Belomestny and J. Schoenmakers. Advanced simulation-based methods for optimal stopping and control. Palgrave Macmillan, London, 2018.
  • D. Belomestny, J. Schoenmakers, V. Spokoiny, and B. Zharkynbay. Optimal stopping via reinforced regression. Comm. in Math. Sci., 18(1):109–121, 2020.

Preprints

  • C. Bayer, R. Tempone, and S. Wolfers. Pricing American options by exercise rate optimization, 10 Aug 2019, arXiv:1809.07300.
  • C. Bayer, D. Belomestny, P. Hager, P. Pigato, J. Schoenmakers. Randomized optimal stopping algorithms and their convergence analysis, 2 Feb 2020 arXiv:2002.00816.
  • P. Hager, E. Neuman. The Multiplicative Chaos of H=0 Fractional Brownian Fields, 4 Aug 2020, arxiv:2008.01385.
  • C. Bayer, D. Belomestny, P. Hager, P. Pigato, J. Schoenmakers, V. Spokoiny. Reinforced optimal control, 24 Nov 2020, arxiv:2011.1238.
  • C. Bayer, P. Hager, S. Riedel, J. Schoenmakers. Optimal stopping with signatures, 26 Nov 2020, WIAS.PREPRINT.2790.
  • P. K. Friz, P. Hager, N. Tapia, Unified Signature Cumulants and Generalized Magnus Expansions, 8 Feb 2021, arxiv:2102.03345.

Selected Pictures

Hierarchical Reinforced Regression

Hierarchical Reinforced Regression – Multiple Stopping Example

Rough volatility

Rough Volatility

Exercise rate for max-call option

exercise rate for max-call option

Asymptotic formulas

Implied smile for rough volatility

Implied smile for rough volatility

Moderate deviations - Rough Bergomi model

Moderate deviations – Rough Bergomi model

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