Path Integral and Asset Pricing

Zura Kakushadze

Papers from arXiv.org

Abstract: We give a pragmatic/pedagogical discussion of using Euclidean path integral in asset pricing. We then illustrate the path integral approach on short-rate models. By understanding the change of path integral measure in the Vasicek/Hull-White model, we can apply the same techniques to "less-tractable" models such as the Black-Karasinski model. We give explicit formulas for computing the bond pricing function in such models in the analog of quantum mechanical "semiclassical" approximation. We also outline how to apply perturbative quantum mechanical techniques beyond the "semiclassical" approximation, which are facilitated by Feynman diagrams.

Date: 2014-10, Revised 2016-08
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Published in Quantitative Finance 15(11) (2015) 1759-1771, Featured Article

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1410.1611

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