Quantum Theory of Securities Price Formation in Financial Markets

38 Pages Posted: 17 Apr 2016 Last revised: 18 May 2016

Date Written: April 13, 2016

Abstract

We develop a theory of securities price formation and dynamics based on quantum approach without presuming any similarities with quantum mechanics. Disorder introduced by trading environment leads to probability distribution of returns that is not a smooth curve, but a speckle-pattern fluctuating in both price coordinate and time. This means that any given return can at times acquire a substantial probability of occurring while remaining low on average in time. Still, due to local character of order interaction during price formation the distribution width grows smoothly, has a minimum value at small time scale and exhibits square root behavior at large time scale. Examples of calibration to market data, both intraday and daily, are provided.

Keywords: Market making, quantitative trading, finance, physics of financial markets, market microstructure, price measurement

JEL Classification: C15, C19, G00, G12

Suggested Citation

Sarkissian, Jack, Quantum Theory of Securities Price Formation in Financial Markets (April 13, 2016). Available at SSRN: https://ssrn.com/abstract=2765298 or http://dx.doi.org/10.2139/ssrn.2765298

Jack Sarkissian (Contact Author)

Algostox Trading ( email )

United States

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