April 18, 2023 · 2 min read

Application of Tensor Neural Networks to Pricing Bermudan Swaptions

The Cheyette model is a quasi-Gaussian volatility interest rate model widely used to price interest rate derivatives such as European and Bermudan Swaptions for which Monte Carlo simulation has become the industry standard.

Multiverse Computing

In low dimensions, these approaches provide accurate and robust prices for European Swaptions but, even in this computationally simple setting, they are known to underestimate the value of Bermudan Swaptions when using the state variables as regressors. This is mainly due to the use of a finite number of predetermined basis functions in the regression. Moreover, in high-dimensional settings, these approaches succumb to the Curse of Dimensionality. To address these issues, Deep-learning techniques have been used to solve the backward Stochastic Differential Equation associated with the value process for European and Bermudan Swaptions; however, these methods are constrained by training time and memory. To overcome these limitations, we propose leveraging Tensor Neural Networks as they can provide significant parameter savings while attaining the same accuracy as classical Dense Neural Networks. In this paper we rigorously benchmark the performance of Tensor Neural Networks and Dense Neural Networks for pricing European and Bermudan Swaptions, and we show that Tensor Neural Networks can be trained faster than Dense Neural Networks and provide more accurate and robust prices than their Dense counterparts.

Full paper available here.

About Multiverse Computing

Multiverse Computing is the leader in quantum-inspired AI model compression. The company’s deep expertise in quantum software led to the development of CompactifAI, a revolutionary compressor that reduces computing requirements and unleashes new use cases for AI across industries. Headquartered in Donostia, Spain, with offices in the United States, Canada, and across Europe, Multiverse serves more than 100 global customers, including Iberdrola, Bosch, and the Bank of Canada.