From quantum mechanics to finance: Microfoundations for jumps, spikes and high volatility phases in diffusion price processes

TL;DR

This paper introduces a microscopic agent-based model inspired by quantum mechanics to explain jumps, spikes, and high volatility in asset prices, linking agent behavior to market dynamics.

Contribution

It provides a novel microfoundational framework connecting quantum-inspired agent behavior to realistic financial market phenomena.

Findings

The model reproduces jumps and spikes in asset prices.

Conditions for convergence to diffusion processes are established.

The approach bridges quantum mechanics and financial market modeling.

Abstract

We present an agent behavior based microscopic model that induces jumps, spikes and high volatility phases in the price process of a traded asset. We transfer dynamics of thermally activated jumps of an unexcited/ excited two state system discussed in the context of quantum mechanics to agent socio-economic behavior and provide microfoundations. After we link the endogenous agent behavior to price dynamics we establish the circumstances under which the dynamics converge to an It\^o-diffusion price processes in the large market limit.