Abstract
Owing to the globalization of the economy, the concept of entangled markets started to form, and this occurrence has smoothed the entrance of quantum mechanics into behavioral finance. In this manuscript, we introduce quantum risk and perform an analysis on portfolio optimization by controlling the quantum potential. We apply this method to eight major indices and construct a portfolio with a minimum quantum risk. The results show quantum risk has a power law behavior with a time-scale just as a standard deviation with different exponents.
Highlights
It may appear to be far-fetched, but the formalism of quantum mechanics can be a perfect candidate for such a situation, where the probability density function (PDF) is taken as an input of the theory and it gets rid of all the classical problems, including moments
We use the notion of quantum risk, which we heuristically introduced in Figure 1b, in order to optimize the quantum risk associated to a portfolio
We showed how a simple concept of the quantum mechanical formalism can begin to aid us in risk management
Summary
Bolgorian et al [16] found a method to introduce a portfolio with minimized waiting time, for a particular return and known risk In all of these methods, variance plays an important role as a classical correlation function in the process of optimization. It may appear to be far-fetched, but the formalism of quantum mechanics can be a perfect candidate for such a situation, where the PDF is taken as an input of the theory and it gets rid of all the classical problems, including moments It was the pioneering work of Andrei Khrennikov [17,18] which established the quantum mechanical approach in finance.
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