{"ID":2835578,"CreatedAt":"2026-06-01T04:54:23.091178241Z","UpdatedAt":"2026-06-01T04:54:23.091178241Z","DeletedAt":null,"paper_url":"https://arxiv.org/abs/2511.23295","arxiv_id":"2511.23295","title":"Signature approach for pricing and hedging path-dependent options with frictions","abstract":"We introduce a novel signature approach for pricing and hedging path-dependent options with instantaneous and permanent market impact under a mean-quadratic variation criterion. Leveraging the expressive power of signatures, we recast an inherently nonlinear and non-Markovian stochastic control problem into a tractable form, yielding hedging strategies in (possibly infinite) linear feedback form in the time-augmented signature of the control variables, with coefficients characterized by non-standard infinite-dimensional Riccati equations on the extended tensor algebra. Numerical experiments demonstrate the effectiveness of these signature-based strategies for pricing and hedging general path-dependent payoffs in the presence of frictions. In particular, market impact naturally smooths optimal trading strategies, making low-truncated signature approximations highly accurate and robust in frictional markets, contrary to the frictionless case.","short_abstract":"We introduce a novel signature approach for pricing and hedging path-dependent options with instantaneous and permanent market impact under a mean-quadratic variation criterion. Leveraging the expressive power of signatures, we recast an inherently nonlinear and non-Markovian stochastic control problem into a tractable...","url_abs":"https://arxiv.org/abs/2511.23295","url_pdf":"https://arxiv.org/pdf/2511.23295v1","authors":"[\"Eduardo Abi Jaber\",\"Donatien Hainaut\",\"Edouard Motte\"]","published":"2025-11-28T15:52:04Z","proceeding":"q-fin.PM","tasks":"[\"q-fin.PM\",\"math.OC\",\"q-fin.MF\",\"q-fin.PR\"]","methods":"[]","has_code":false}