mlsanityData to 13 Oct 2026

Signature approach for pricing and hedging path-dependent options with frictions

arXiv 2511.23295 ↗First posted 28 Nov 2025q-fin.PM math.OC q-fin.MFcited by 3

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Abstract (arXiv)

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.

Key facts. Cited by 3 papers in the map (data through 13 Oct 2026). First posted on arXiv 28 Nov 2025.

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3 papers.