Bridging Stochastic Control and Deep Hedging: Structural Priors for No-Transaction Band Networks

This paper studies the problem of hedging and pricing a European call option under proportional transaction costs, from two complementary perspectives. We first derive the optimal hedging strategy under CARA utility, following the stochastic control framework of Davis et al. (1993), characterising the no-transaction band via the Hamilton-Jacobi-Bellman Quasi-Variational Inequality (HJBQVI) and the Whalley-Wilmott asymptotic approximation. We then adopt a deep hedging approach, proposing two architectures that build on the No-Transaction Band Network of Imaki et al. (2023): NTBN-Delta, which makes delta-centring explicit, and WW-NTBN, which incorporates the Whalley-Wilmott formula as a structural prior on the bandwidth and replaces the hard clamp with a differentiable soft clamp. Numerical experiments show that WW-NTBN converges faster, matches the stochastic control no-transaction bands more closely, and generalises well across transaction cost regimes. We further apply both frameworks to the bull call spread, documenting the breakdown of price linearity under transaction costs.