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arXiv:1304.4995 · International Journal of Pure and Apllied Mathematics

SCHR\"ODINGER GROUP AND QUANTUM FINANCE

Juan M. Romero, Ulises Lavana, Elio Agustín Martínez Miranda

Published Jan 30, 2014• 3 citations
arXivHTMLPDF

Abstract

Using the one dimensional free particle symmetries, the quantum finance symmetries are obtained.Namely, it is shown that Black-Scholes equation is invariant under Schrödinger group.In order to do this, the one dimensional free non-relativistic particle and its symmetries are revisited.To get the Black-Scholes equation symmetries, the particle mass is identified as the inverse of square of the volatility.Furthermore, using financial variables, a Schrödinger algebra representation is constructed.

DOI
10.12732/ijpam.v90i3.3

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Using the one dimensional free particle symmetries, the quantum finance symmetries are obtained.Namely, it is shown that Black-Scholes equation is invariant under Schrödinger group.In order to do this, the one dimensional free non-relativistic particle and its symmetries are revisited.To get the Black-Scholes equation symmetries, the particle mass is identified as the inverse of square of the volatility.Furthermore, using financial variables, a Schrödinger algebra representation is constructed.
The Group Quantization formalism is a scheme for constructing a functional space that is an irreducible infinite dimensional representation of the Lie algebra belonging to a dynamical symmetry group. We apply this formalism to the construction of functional space and operators for quadratic potentials -- gaussian pricing kernels in finance. We describe the Black-Scholes theory, the Ho-Lee interest rate model and the Euclidean repulsive and attractive oscillators. The symmetry group used in this work has the structure of a principal bundle with base (dynamical) group a semi-direct extension of the Heisenberg-Weyl group by SL(2,R), and structure group (fiber) the positive real line.
We analyze the phenomena of spontaneous symmetry breaking in quantum finance by using as a starting point the Black-Scholes (BS) and the Merton-Garman (MG) equations expressed in the Hamiltonian form. In this scenario the martingale condition (state) corresponds to the vacuum state which becomes degenerate when the symmetry of the system is spontaneously broken. We then analyze the broken symmetries of the system and we interpret from the perspective of financial markets the possible appearance of the Nambu-Goldstone bosons.
This paper explores the implications of modifying the canonical Heisenberg commutation relations over two simple systems, such as the free particle and the tunnel effect generated by a step-like potential. The modified commutation relations include position-dependent and momentum-dependent terms analyzed separately. For the position deformation case, the corresponding free wave functions are sinusoidal functions with a variable wave vector k(x). In the momentum deformation case, the wave function has the usual sinusoidal behavior, but the energy spectrum becomes non-symmetric in terms of momentum. Tunneling probabilities depend on the deformation strength for both cases. Also, surprisingly, the quantum mechanical model generated by these modified commutation relations is related to the Black–Scholes model in finance. In fact, by taking a particular form of a linear position deformation, one can derive a Black–Scholes equation for the wave function when an external electromagnetic potential is acting on the particle. In this way, the Scholes model can be interpreted as a quantum-deformed model. Furthermore, by identifying the position coordinate x in quantum mechanics with the underlying asset S, which in finance satisfies stochastic dynamics, this analogy implies that the Black–Scholes equation becomes a quantum mechanical system defined over a random spatial geometry. If the spatial coordinate oscillates randomly about its mean value, the quantum particle’s mass would correspond to the inverse of the variance of this stochastic coordinate. Further, because this random geometry is nothing more than gravity at the microscopic level, the Black–Scholes equation becomes a possible simple model for understanding quantum gravity.
Abstract A free particle may be characterized abstractly in terms of its invariance group. Both the Hamilton-Jacobi and Schrödinger equations for classical and quantum free particles are invariant under the same group, the Schrödinger group. The aim of this paper is to discuss possible restrictions on non-linear generalizations of quantum mechanics. The basic idea is to search for those non-linear generalization of quantum mechanics for which a description of the non-relativistic free particle includes a representation of the Schrödinger group, as in classical and quantum mechanics. This condition imposes strong constraints on possible models of free particles. To carry out such an investigation it is necessary to select an appropriate mathematical formalism, one which can describe physical systems of non-relativistic particles and allows for the incorporation of non-linearities in a natural way. Here the formalism of ensembles on configuration space is used, which is an approach that is capable of describing both classical and quantum systems and, in addition, allows for more general theories that describe mixed classical-quantum systems. Modifications of the equations involving derivatives of up to fourth order are considered
The Accardi-Boukas quantum Black-Scholes framework, provides a means by which one can apply the Hudson-Parthasarathy quantum stochastic calculus to problems in finance. Solutions to these equations can be modelled using nonlocal diffusion processes, via a Kramers-Moyal expansion, and this provides useful tools to understand their behaviour. In this paper we develop further links between quantum stochastic processes, and nonlocal diffusions, by inverting the question, and showing how certain nonlocal diffusions can be written as quantum stochastic processes. We then go on to show how one can use path integral formalism, and PT symmetric quantum mechanics, to build a non-Gaussian kernel function for the Accardi-Boukas quantum Black-Scholes. Behaviours observed in the real market are a natural model output, rather than something that must be deliberately included.