# Generating drawdown-realistic financial price paths using path signatures

arXiv: https://arxiv.org/abs/2309.04507 · HTML: https://mlsanity.com/paper/2309.04507/

## Key facts

- No citing papers in the map yet (data through 14 Oct 2026).
- Builds on 12 of its 46 references that are in the map.
- First posted on arXiv 8 Sep 2023.

## Builds on (most cited first, 12 of 12)

- [Adam: A Method for Stochastic Optimization](https://mlsanity.com/paper/1412.6980/) (2014)
- [Generative Adversarial Networks](https://mlsanity.com/paper/2203.00667/) (2022)
- [Semi-Supervised Learning with Deep Generative Models](https://mlsanity.com/paper/1406.5298/) (2014)
- [Quant GANs: Deep Generation of Financial Time Series](https://mlsanity.com/paper/1907.06673/) (2019)
- [Signature moments to characterize laws of stochastic processes](https://mlsanity.com/paper/1810.10971/) (2018)
- [Signatory: differentiable computations of the signature and logsignature transforms, on both CPU and GPU](https://mlsanity.com/paper/2001.00706/) (2020)
- [A Data-driven Market Simulator for Small Data Environments](https://mlsanity.com/paper/2006.14498/) (2020)
- [Signature Methods in Machine Learning](https://mlsanity.com/paper/2206.14674/) (2022)
- [Distribution Regression for Sequential Data](https://mlsanity.com/paper/2006.05805/) (2020)
- [Generative Adversarial Networks for Financial Trading Strategies Fine-Tuning and Combination](https://mlsanity.com/paper/1901.01751/) (2019)
- [Learning stochastic differential equations using RNN with log signature features](https://mlsanity.com/paper/1908.08286/) (2019)
- [Deep Hedging: Learning to Remove the Drift under Trading Frictions with Minimal Equivalent Near-Martingale Measures](https://mlsanity.com/paper/2111.07844/) (2021)

## Abstract (arXiv)

A novel generative machine learning approach for the simulation of sequences of financial price data with drawdowns quantifiably close to empirical data is introduced. Applications such as pricing drawdown insurance options or developing portfolio drawdown control strategies call for a host of drawdown-realistic paths. Historical scenarios may be insufficient to effectively train and backtest the strategy, while standard parametric Monte Carlo does not adequately preserve drawdowns. We advocate a non-parametric Monte Carlo approach combining a variational autoencoder generative model with a drawdown reconstruction loss function. To overcome issues of numerical complexity and non-differentiability, we approximate drawdown as a linear function of the moments of the path, known in the literature as path signatures. We prove the required regularity of drawdown function and consistency of the approximation. Furthermore, we obtain close numerical approximations using linear regression for fractional Brownian and empirical data. We argue that linear combinations of the moments of a path yield a mathematically non-trivial smoothing of the drawdown function, which gives one leeway to simulate drawdown-realistic price paths by including drawdown evaluation metrics in the learning objective. We conclude with numerical experiments on mixed equity, bond, real estate and commodity portfolios and obtain a host of drawdown-realistic paths.