Quantum effects in an expanded Black–Scholes model

Abstract

The limitations of the classical Black–Scholes model are examined by comparing calculated and actual historical prices of European call options on stocks from several sectors of the S &P 500. Persistent differences between the two prices point to an expanded model proposed by Segal and Segal (PNAS 95:4072–4075, 1988) in which information not simultaneously observable or actionable with public information can be represented by an additional pseudo-Wiener process. A real linear combination of the original and added processes leads to a commutation relation analogous to that between a boson field and its canonical momentum in quantum field theory. The resulting pricing formula for a European call option replaces the classical volatility with the norm of a complex quantity, whose imaginary part is shown to compensate for the disparity between prices obtained from the classical Black–Scholes model and actual prices of the test call options. This provides market evidence for the influence of a non-classical process on the price of a security based on non-commuting operators.Graphic