Calibration and simulation of arbitrage effects in a non-equilibrium quantum Black-Scholes model by using semiclassical methods

TL;DR

This paper develops a semi-classical method to calibrate and simulate arbitrage effects in a non-equilibrium quantum Black-Scholes model, enabling extraction of market imperfection parameters from empirical data.

Contribution

It introduces a novel semi-classical approach to infer the time-dependent arbitrage potential and bubble shape from real financial data within a quantum-inspired Black-Scholes framework.

Findings

Non-equilibrium model outperforms traditional Black-Scholes in data fitting.

Semi-classical solutions enable effective calibration of arbitrage bubbles.

Method improves option pricing accuracy in markets with imperfections.

Abstract

An interacting Black-Scholes model for option pricing, where the usual constant interest rate r is replaced by a stochastic time dependent rate r(t) of the form r(t)=r+f(t) dW/dt, accounting for market imperfections and prices non-alignment, was developed in [1]. The white noise amplitude f(t), called arbitrage bubble, generates a time dependent potential U(t) which changes the usual equilibrium dynamics of the traditional Black-Scholes model. The purpose of this article is to tackle the inverse problem, that is, is it possible to extract the time dependent potential U(t) and its associated bubble shape f(t) from the real empirical financial data? In order to give an answer to this question, the interacting Black-Scholes equation must be interpreted as a quantum Schrodinger equation with hamiltonian operator H=H0+U(t), where H0 is the equilibrium Black-Scholes hamiltonian and U(t) is the interaction term. If the U(t) term is small enough, the interaction potential can be thought as a perturbation, so one can compute the solution of the interacting Black-Scholes equation in an approximate form by perturbation theory. In [2] by applying the semi-classical considerations, an approximate solution of the non equilibrium Black-Scholes equation for an arbitrary bubble shape f(t) was developed. Using this semi-classical solution and the knowledge about the mispricing of the financial data, one can determinate an equation, which solutions permit obtain the functional form of the potential term U(t) and its associated bubble f(t). In all the studied cases, the non equilibrium model performs a better estimation of the real data than the usual equilibrium model. It is expected that this new and simple methodology for calibrating and simulating option pricing solutions in the presence of market imperfections, could help to improve option pricing estimations.