Quantum model for the price dynamics: The problem of smoothness of trajectories

We apply methods of quantum mechanics to mathematical modelling of price dynamics in a financial market. We propose to describe behavioral financial factors (e.g., expectations of traders) by using the pilot wave (Bohmian) model of quantum mechanics. Our model is a quantum-like model of the financial market, cf. with works of W. Segal, I.E. Segal, E. Haven. In this paper we study the problem of smoothness of price-trajectories in the Bohmian financial model. We show that even the smooth evolution of the financial pilot wave ψ(t,x) (representing expectations of traders) can induce jumps of prices of shares.     

Pricing in an equilibrium based model for a large investor

We study a financial model with a non-trivial price impact effect. In this model we consider the interaction of a large investor trading in an illiquid security, and a market maker who is quoting prices for this security. We assume that the market maker quotes the prices such that by taking the other side of the investor’s demand, the market maker will arrive at maturity with the maximal expected utility of the terminal wealth. Within this model we provide an explicit recursive pricing formula for an exponential utility function, as well as an asymptotic expansion for the price for a “small” simple demand.     

Rough paths in idealized financial markets

This paper considers possible price paths of a financial security in an idealized market. Its main result is that the variation index of typical price paths is at most 2; in this sense, typical price paths are not rougher than typical paths of Brownian motion. We do not make any stochastic assumptions and only assume that the price path is right-continuous. The qualification “typical” means that there is a trading strategy (constructed explicitly in the proof) that risks only one monetary unit but brings infinite capital when the variation index of the realized price path exceeds 2. The paper also reviews some known results for continuous price paths.     

Convergence of Utility Indifference Prices to the Superreplication Price: the Whole Real Line Case

A discrete-time financial market model is considered with a sequence of investors whose preferences are described by concave strictly increasing functions defined on the whole real line. Under suitable conditions we prove that, whenever their absolute risk-aversion tends to infinity, the respective utility indifference prices of a given bounded contingent claim converge to the superreplication price. We also prove that there exists an accumulation point of the optimal strategies’ sequence which is a superhedging strategy.     

Option Pricing on Multiple Assets

Since 1973, the Black–Scholes formula has been used in financial markets to price financial derivatives such as options. In the classical Black–Scholes model for the market, the following type of mix is assumed or postulated: in the simplest case, it consists of an essentially riskless bond and a single risky asset. Hence, certainty mixed with uncertainty: safe vs risky! Here we consider more complex products where each component in a portfolio entails several variables with constraints. This leads to elegant models based on multivariable stochastic integration, and describing several securities simultaneously [Etheridge, A Course in Financial Calculus, Cambridge University Press, UK (2002), Jiang, Mathematical Modeling and Methods of Option Pricing, Higher Education, Beijing, China (2003)] and [Broadie, Detemple, Math. Financ. 7:241–286 (1997)]. We derive a general asymptotic solution in a short time interval using the heat kernel expansion on a Riemannian metric. We then use our formula to predict the better price of options on multiple underlying assets. We then apply our method to the case known as the two-color rainbow option, i.e., the special case of the model with two underlying assets. This asymptotic solution is important, as it explains hidden effects in a class of financial models.This paper is dedicated to the memory of the first named author, Professor Thomas P. Branson (1953–2006).     

Convergence of Utility Indifference Prices to the Superreplication Price

A discrete-time financial market model is considered with a sequence of investors whose preferences are described by concave strictly increasing functions defined on the positive axis. Under suitable conditions, we show that the utility indifference prices of a bounded contingent claim converge to its superreplication price when the investors’ absolute risk-aversion tends to infinity.     

Almost sure Nash equilibrium strategies in evolutionary models of asset markets

We consider a stochastic model of a financial market with long-lived dividend-paying assets and endogenous asset prices. The model was initially developed and analyzed in the context of evolutionary finance, with the main focus on questions of “survival and extinction” of investment strategies. In this paper we view the model from a different, game-theoretic, perspective and examine Nash equilibrium strategies, satisfying equilibrium conditions with probability one.     

Equilibria of a two-stage market with chance outcome in the spot market

We address the problem of how to improve the efficiency of markets of similar goods (electric power, gas, and other resources). One way to undermine the market dominance of some companies is the possibility of forward contracts. Here a model of the spot and forward markets functioning as Curnout auctions is studied using the example of symmetrical oligopoly. Suppliers try to maximize their profit by this two-stage game’s strategies of traded subgame equilibrium (TSE). The conditions for equilibrium achieved by correlated mixed strategies are elucidated: either a “bull” or “bear” market is established according to a chance factor. The optimum strategies of rational bidders are found to depend on the reserve price and a risk-avoiding parameter. TSE is compared to the Nash equilibria for one-stage models.     

Path integral in the energy representation in quantum mechanics

We consider an alternative path integral approach to quantum mechanics. We present a resolvent of a Hamiltonian (which is the Laplace transform of the evolution operator) in a form that has the meaning of “the sum over paths” but is much better defined than the usual functional integral. We investigate this representation from different standpoints and compare such an approach to quantum mechanics with the standard approaches. __________ Translated from Teoreticheskaya i Matematicheskaya Fizika, Vol. 156, No. 1, pp. 92–111, July, 2008.     

The duality of quantum Liouville field theory

It has been found empirically that the Virasoro center and three-point functions of quantum Liouville field theory with the potential exp(2bϕ(x)) and the external primary fields exp(αϕ(x)) are invariant with respect to the duality transformations ℏα→q−α, where q=b⁻¹+b. The steps leading to this result (via the Virasoro algebra and three-point functions) are reviewed in the path-integral formalism. The duality occurs because the quantum relationship between the α and the conformal weights Δ_α is two-to-one. As a result, the quantum Liouville potential can actually contain two exponentials (with related parameters). In the two-exponential theory, the duality appears naturally, and an important previously conjectured extrapolation can be proved. Translated from Teoreticheskaya i Matematicheskaya Fizika, Vol. 123, No. 2, pp. 299–307, May, 2000.     

Exactly solvable two-dimensional complex model with a real spectrum

Using supersymmetric intertwining relations of the second order in derivatives, we construct a two-dimensional quantum model with a complex potential for which all energy levels and the corresponding wave functions are obtained analytically. This model does not admit separation of variables and can be considered a complexified version of the generalized two-dimensional Morse model with an additional sinh ⁻² term. We prove that the energy spectrum of the model is purely real. To our knowledge, this is a rather rare example of a nontrivial exactly solvable model in two dimensions. We explicitly find the symmetry operator, describe the biorthogonal basis, and demonstrate the pseudo-Hermiticity of the Hamiltonian of the model. The obtained wave functions are simultaneously eigenfunctions of the symmetry operator. Dedicated to the 80th birthday of Yuri Victorovich Novozhilov __________ Translated from Teoreticheskaya i Matematicheskaya Fizika, Vol. 148, No. 1, pp. 102–111, July, 2006.     

An extension of the Clark–Haussmann formula and applications

ABSTRACT

This work considers a financial market stochastic model where the uncertainty is driven by a multidimensional Brownian motion. The market price of the risk process makes the transition between real world probability measure and risk neutral probability measure. Traditionally, the martingale representation formulas under the risk neutral probability measure require the market price of risk process to be bounded. However, in several financial models the boundedness assumption of the market price of risk fails; for example a financial market model with the market price of risk following an Ornstein–Uhlenbeck process. This work extends the Clark–Haussmann representation formula to underlying stochastic processes which fail to satisfy the standard requirements. Our methodology is classical, and it uses a sequence of mollifiers. Our result can be applied to hedging and optimal investment in financial markets with unbounded market price of risk. In particular, the mean variance optimization problem can be addressed within our framework.     

A transformational property of the Husimi function and its relation to the wigner function and symplectic tomograms

We consider the Husimi Q-functions, which are quantum quasiprobability distributions in the phase space, and investigate their transformation properties under a scale transformation (q, p) → (λq, λp). We prove a theorem that under this transformation, the Husimi function of a physical state is transformed into a function that is also a Husimi function of some physical state. Therefore, the scale transformation defines a positive map of density operators. We investigate the relation of Husimi functions to Wigner functions and symplectic tomograms and establish how they transform under the scale transformation. As an example, we consider the harmonic oscillator and show how its states transform under the scale transformation.     

Relaxation Time of Quantized Toral Maps

We introduce the notion of relaxation time for noisy quantum maps on the 2d-dimensional torus – generalization of previously studied dissipation time. We show that the relaxation time is sensitive to the chaotic behavior of the corresponding classical system if one simultaneously considers the semiclassical limit together with the limit of small noise strength (ε → 0). Focusing on quantized smooth Anosov maps, we exhibit a semiclassical régime (where E > 1) in which classical and quantum relaxation times share the same asymptotics: in this régime, a quantized Anosov map relaxes to equilibrium fast, as the classical map does. As an intermediate result, we obtain rigorous estimates of the quantum-classical correspondence for noisy maps on the torus, up to times logarithmic in On the other hand, we show that in the “quantum régime” quantum and classical relaxation times behave very differently. In the special case of ergodic toral symplectomorphisms (generalized “Arnold’s cat” maps), we obtain the exact asymptotics of the quantum relaxation time and precise the régime of correspondence between quantum and classical relaxations. Communicated by Jens Marklof submitted 4/01/05, accepted 2/02/05     

Modelling and measuring the irrational behaviour of agents in financial markets: Discovering the psychological soliton

Following a Geometrical Brownian Motion extension into an Irrational fractional Brownian Motion model, we re-examine agent behaviour reacting to time dependent news on the log-returns thereby modifying a financial market evolution. We specifically discuss the role of financial news or economic information positive or negative feedback of such irrational (or contrarian) agents upon the price evolution. We observe a kink-like effect reminiscent of soliton behaviour, suggesting how analysts' forecasts errors induce stock prices to adjust accordingly, thereby proposing a measure of the irrational force in a market.     

On the strategic origin of Brownian motion in finance

This paper is concerned with the strategic use of a private information on the stock market. A repeated auction model is used to analyze the evolution of the price system on a market with asymmetric information.  The model turns out to be a zero-sum repeated game with one-sided information, as introduced by Aumann and Maschler.  The stochastic evolution of the price system can be explicitly computed in the n times repeated case. As n grows to ∞, this process tends to a continuous time martingale related to a Brownian Motion.  This paper provides in this way an endogenous justification for the appearance of Brownian Motion in Finance theory. Received: February 2002     

Illiquid financial market models and absence of arbitrage

We study financial market models with different liquidity effects. In the first part of this paper, we extend the short-term price impact model introduced by Rogers and Singh (2007) to a general semimartingale setup. We show the convergence of the discrete-time into the continuous-time modeling framework when trading times approach each other. In the second part, arbitrage opportunities in illiquid economies are considered, in particular a modification of the feedback effect model of Bank and Baum (2004). We demonstrate that a large trader cannot create wealth at no risk within this framework. Here we have to assume that the price process is described by a continuous semimartingale.     

Pricing and hedging in the presence of extraneous risks

Given an underlying complete financial market, we study contingent claims whose payoffs may depend on the occurrence of nonmarket events. We first investigate the almost-sure hedging of such claims. In particular, we obtain new representations of the hedging prices and provide necessary and sufficient conditions for a claim to be marketed. The analysis of various examples then leads us to investigate alternative pricing rules. We choose to embed the pricing problem into the agent’s portfolio decision and study reservation prices. We establish the existence and consistency of this pricing rule in a semimartingale model. We characterize the nonlinear dependence of the reservation price with respect to both the agent’s initial capital and the size of her position. The fair price arises as a limiting case.     

Zero-level pricing method with transaction cost

In this research, we extend Luenberger’s (J Econ Dyn Contr 26(10), 1613–1628, 2002) results on zero-level pricing method to the market with transaction cost. We show that the zero-level price exists in this market. Both the zero-level pricing method and the no-arbitrage pricing method produce price intervals, but the zero-level price interval is smaller than the no-arbitrage price interval. Although the zero-level price interval in general depends on the utility function and initial wealth, we show the zero-level price interval is identical for all individuals with different levels of initial wealth and the HARA utility functions in which one parameter is fixed.     

Piecewise linear processes with Poisson‐modulated exponential switching times

We consider the jump telegraph process when switching intensities depend on external shocks also accompanying with jumps. The incomplete financial market model based on this process is studied. The Esscher transform, which changes only unobservable parameters, is considered in detail. The financial market model based on this transform can price switching risks as well as jump risks of the model.