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Cambridge University Press eBooks

Synopsis

Belal Ehsan Baaquie

Published Nov 15, 2004• 0 citations
Publisher

Abstract

Two underlying themes run through this book: first, defining and analyzing the subject of quantitative finance in the conceptual and mathematical framework of quantum theory, with special emphasis on its path-integral formulation, and, second, the introduction of the techniques and methodology of quantum field theory in the study of interest rates. No attempt is made to apply quantum theory in re-working the fundamental principles of finance. Instead, the term ‘quantum’ refers to the abstract mathematical constructs of quantum theory that include probability theory, state space, operators, Hamiltonians, commutation equations, Lagrangians, path integrals, quantized fields, bosons, fermions and so on. All these theoretical structures find natural and useful applications in finance. The path integral and Hamiltonian formulations of (random) quantum processes have been given special emphasis since they are equivalent to, as well as independent of, the formalism of stochastic calculus – which currently is one of the cornerstones of mathematical finance. The starting point for the application of path integrals and Hamiltonians in finance is in stock option pricing. Path integrals are subsequently applied to the modelling of linear and nonlinear theories of interest rates as a two-dimensional quantum field, something that is beyond the scope of stochastic calculus. Path integrals have the additional advantage of providing a framework for efficiently implementing the mathematical procedure of renormalization which is necessary in the study of nonlinear quantum field theories. The term ‘Quantum Finance’ represents the synthesis of the concepts, methods and mathematics of quantum theory, with the field of theoretical and applied finance.

DOI
10.1017/cbo9780511617577.003

Related papers

Quantum Finance

Belal Ehsan Baaquie

This book applies the mathematics and concepts of quantum mechanics and quantum field theory to the modelling of interest rates and the theory of options. Particular emphasis is placed on path integrals and Hamiltonians. Financial mathematics is dominated by stochastic calculus. The present book offers a formulation that is completely independent of that approach. As such many results emerge from the ideas developed by the author. This work will be of interest to physicists and mathematicians working in the field of finance, to quantitative analysts in banks and finance firms and to practitioners in the field of fixed income securities and foreign exchange. The book can also be used as a graduate text for courses in financial physics and financial mathematics.

Cambridge University Press eBooks•Nov 15, 2004•225 citations

Epilogue

Belal Ehsan Baaquie

At present, mainstream theoretical finance is almost completely dominated by stochastic calculus. Quantum finance , in contrast, presents a formulation of finance that is completely independent of stochastic calculus. Quantum finance addressed only a few problems of finance. The onus thus fell on me to demonstrate that a wide class of problems of finance, which at present are understood in terms of stochastic calculus, have a natural quantum finance formulation and generalization. It needed to be established that the quantum formulation of finance is equivalent to the one based on stochastic calculus and – if it is to be useful for the practitioners – is conceptually transparent and computationally tractable. Furthermore, it needed to be shown that quantum finance is not merely equivalent to stochastic calculus but goes beyond it; namely, that models based on quantum finance are more general than those based on stochastic calculus. Interest rates and coupon bonds and their derivatives form a major component of the debt market. They are, by far, the most complex and intricate types of financial instruments that also have a rich mathematical structure. Debt instruments provided an ideal testing ground for quantum finance . I gravitated to the study of interest rates and coupon bonds, since these financial instruments provide an excellent arena for exhibiting the main features of quantum finance – as well as for illustrating its point of departure from stochastic calculus. No attempt has been made to survey the subject of debt instruments, for which there exists a vast corpus of literature. Instead, this book has focused on only new results that have been obtained by applying quantum finance to debt instruments.

Cambridge University Press eBooks•Sep 17, 2009•0 citations

Quantum Finance: Path Integrals and Hamiltonians for Options and Interest Rates

Belal Ehsan Baaquie

Foreword Preface Acknowledgements 1. Synopsis Part I. Fundamental Concepts of Finance: 2. Introduction to finance 3. Derivative securities Part II. Systems with Finite Number of Degrees of Freedom: 4. Hamiltonians and stock options 5. Path integrals and stock options 6. Stochastic interest rates' Hamiltonians and path integrals Part III. Quantum Field Theory of Interest Rates Models: 7. Quantum field theory of forward interest rates 8. Empirical forward interest rates and field theory models 9. Field theory of Treasury Bonds' derivatives and hedging 10. Field theory Hamiltonian of forward interest rates 11. Conclusions Appendix A: mathematical background Brief glossary of financial terms Brief glossary of physics terms List of main symbols References Index.

•Jan 1, 2004•227 citations

Synopsis

Belal Ehsan Baaquie

This book studies the mathematical aspect of path integrals and Hamiltonians – which emerge from the formulation of quantum mechanics. The theoretical framework of quantum mechanics provides the mathematical tools for studying both quantum indeterminacy and classical randomness . Many problems arising in quantum mechanics as well as in vastly different fields such as finance and economics can be addressed by the mathematics of quantum mechanics, or quantum mathematics in short. All the topics and subjects in the various chapters have been specifically chosen to illustrate the structure of quantum mathematics, and are not tied to any specific discipline, be it quantum mechanics or stochastic systems. The book is divided into the following six parts, in accordance with the Chapter dependency flowchart given below. Part one addresses the Fundamental principles of path integrals and (Hamiltonian) operators and consists of five chapters. Chapter 2 is on the Mathematical structure of quantum mechanics and introduces the mathematical framework that emerges from the quantum principle. Chapters 3 to 6 discuss the mathematical pillars of quantum mathematics, starting from the Feynman path integral, summarizing Hamiltonian mechanics and introducing path integral quantization. Part two is on Stochastic processes . Stochastic systems are dissipative and are shown to be effectively modeled by the path integral. Chapter 7 is focused on the application of quantum mathematics to classical random systems and to stochastic processes.

Cambridge University Press eBooks•Mar 27, 2014•0 citations

Path Integrals and Hamiltonians

Belal Ehsan Baaquie

Providing a pedagogical introduction to the essential principles of path integrals and Hamiltonians, this book describes cutting-edge quantum mathematical techniques applicable to a vast range of fields, from quantum mechanics, solid state physics, statistical mechanics, quantum field theory, and superstring theory to financial modeling, polymers, biology, chemistry, and quantum finance. Eschewing use of the Schrödinger equation, the powerful and flexible combination of Hamiltonian operators and path integrals is used to study a range of different quantum and classical random systems, succinctly demonstrating the interplay between a system's path integral, state space, and Hamiltonian. With a practical emphasis on the methodological and mathematical aspects of each derivation, this is a perfect introduction to these versatile mathematical methods, suitable for researchers and graduate students in physics and engineering.

Cambridge University Press eBooks•Mar 27, 2014•37 citations

QUANTUM MECHANICS, PATH INTEGRALS AND OPTION PRICING: REDUCING THE COMPLEXITY OF FINANCE

Belal Ehsan Baaquie, Claudio Corianò A, Srikant Marakani

Quantum Finance represents the synthesis of the techniques of quantum theory (quantum mechanics and quantum field theory) to theoretical and applied finance. After a brief overview of the connection between these fields, we illustrate some of the methods of lattice simulations of path integrals for the pricing of options. The ideas are sketched out for simple models, such as the Black-Scholes model, where analytical and numerical results are compared. Application of the method to nonlinear systems is also briefly overviewed. More general models, for exotic or path-dependent options are discussed.

arXiv:cond-mat/0208191•Apr 1, 2003•29 citations
Two underlying themes run through this book: first, defining and analyzing the subject of quantitative finance in the conceptual and mathematical framework of quantum theory, with special emphasis on its path-integral formulation, and, second, the introduction of the techniques and methodology of quantum field theory in the study of interest rates. No attempt is made to apply quantum theory in re-working the fundamental principles of finance. Instead, the term ‘quantum’ refers to the abstract mathematical constructs of quantum theory that include probability theory, state space, operators, Hamiltonians, commutation equations, Lagrangians, path integrals, quantized fields, bosons, fermions and so on. All these theoretical structures find natural and useful applications in finance. The path integral and Hamiltonian formulations of (random) quantum processes have been given special emphasis since they are equivalent to, as well as independent of, the formalism of stochastic calculus – which currently is one of the cornerstones of mathematical finance. The starting point for the application of path integrals and Hamiltonians in finance is in stock option pricing. Path integrals are subsequently applied to the modelling of linear and nonlinear theories of interest rates as a two-dimensional quantum field, something that is beyond the scope of stochastic calculus. Path integrals have the additional advantage of providing a framework for efficiently implementing the mathematical procedure of renormalization which is necessary in the study of nonlinear quantum field theories. The term ‘Quantum Finance’ represents the synthesis of the concepts, methods and mathematics of quantum theory, with the field of theoretical and applied finance.
This book applies the mathematics and concepts of quantum mechanics and quantum field theory to the modelling of interest rates and the theory of options. Particular emphasis is placed on path integrals and Hamiltonians. Financial mathematics is dominated by stochastic calculus. The present book offers a formulation that is completely independent of that approach. As such many results emerge from the ideas developed by the author. This work will be of interest to physicists and mathematicians working in the field of finance, to quantitative analysts in banks and finance firms and to practitioners in the field of fixed income securities and foreign exchange. The book can also be used as a graduate text for courses in financial physics and financial mathematics.
At present, mainstream theoretical finance is almost completely dominated by stochastic calculus. Quantum finance , in contrast, presents a formulation of finance that is completely independent of stochastic calculus. Quantum finance addressed only a few problems of finance. The onus thus fell on me to demonstrate that a wide class of problems of finance, which at present are understood in terms of stochastic calculus, have a natural quantum finance formulation and generalization. It needed to be established that the quantum formulation of finance is equivalent to the one based on stochastic calculus and – if it is to be useful for the practitioners – is conceptually transparent and computationally tractable. Furthermore, it needed to be shown that quantum finance is not merely equivalent to stochastic calculus but goes beyond it; namely, that models based on quantum finance are more general than those based on stochastic calculus. Interest rates and coupon bonds and their derivatives form a major component of the debt market. They are, by far, the most complex and intricate types of financial instruments that also have a rich mathematical structure. Debt instruments provided an ideal testing ground for quantum finance . I gravitated to the study of interest rates and coupon bonds, since these financial instruments provide an excellent arena for exhibiting the main features of quantum finance – as well as for illustrating its point of departure from stochastic calculus. No attempt has been made to survey the subject of debt instruments, for which there exists a vast corpus of literature. Instead, this book has focused on only new results that have been obtained by applying quantum finance to debt instruments.
Foreword Preface Acknowledgements 1. Synopsis Part I. Fundamental Concepts of Finance: 2. Introduction to finance 3. Derivative securities Part II. Systems with Finite Number of Degrees of Freedom: 4. Hamiltonians and stock options 5. Path integrals and stock options 6. Stochastic interest rates' Hamiltonians and path integrals Part III. Quantum Field Theory of Interest Rates Models: 7. Quantum field theory of forward interest rates 8. Empirical forward interest rates and field theory models 9. Field theory of Treasury Bonds' derivatives and hedging 10. Field theory Hamiltonian of forward interest rates 11. Conclusions Appendix A: mathematical background Brief glossary of financial terms Brief glossary of physics terms List of main symbols References Index.
This book studies the mathematical aspect of path integrals and Hamiltonians – which emerge from the formulation of quantum mechanics. The theoretical framework of quantum mechanics provides the mathematical tools for studying both quantum indeterminacy and classical randomness . Many problems arising in quantum mechanics as well as in vastly different fields such as finance and economics can be addressed by the mathematics of quantum mechanics, or quantum mathematics in short. All the topics and subjects in the various chapters have been specifically chosen to illustrate the structure of quantum mathematics, and are not tied to any specific discipline, be it quantum mechanics or stochastic systems. The book is divided into the following six parts, in accordance with the Chapter dependency flowchart given below. Part one addresses the Fundamental principles of path integrals and (Hamiltonian) operators and consists of five chapters. Chapter 2 is on the Mathematical structure of quantum mechanics and introduces the mathematical framework that emerges from the quantum principle. Chapters 3 to 6 discuss the mathematical pillars of quantum mathematics, starting from the Feynman path integral, summarizing Hamiltonian mechanics and introducing path integral quantization. Part two is on Stochastic processes . Stochastic systems are dissipative and are shown to be effectively modeled by the path integral. Chapter 7 is focused on the application of quantum mathematics to classical random systems and to stochastic processes.
Providing a pedagogical introduction to the essential principles of path integrals and Hamiltonians, this book describes cutting-edge quantum mathematical techniques applicable to a vast range of fields, from quantum mechanics, solid state physics, statistical mechanics, quantum field theory, and superstring theory to financial modeling, polymers, biology, chemistry, and quantum finance. Eschewing use of the Schrödinger equation, the powerful and flexible combination of Hamiltonian operators and path integrals is used to study a range of different quantum and classical random systems, succinctly demonstrating the interplay between a system's path integral, state space, and Hamiltonian. With a practical emphasis on the methodological and mathematical aspects of each derivation, this is a perfect introduction to these versatile mathematical methods, suitable for researchers and graduate students in physics and engineering.
Quantum Finance represents the synthesis of the techniques of quantum theory (quantum mechanics and quantum field theory) to theoretical and applied finance. After a brief overview of the connection between these fields, we illustrate some of the methods of lattice simulations of path integrals for the pricing of options. The ideas are sketched out for simple models, such as the Black-Scholes model, where analytical and numerical results are compared. Application of the method to nonlinear systems is also briefly overviewed. More general models, for exotic or path-dependent options are discussed.