Relativistically into Finance

Vitor H. Carvalho and Raquel Gaspar

No 2021/0175, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: The change of information near the light speed, advances in high-speed trading, spatial arbitrage strategies and foreseen space exploration, suggest the need to consider the effects of the theory of relativity into finance models. Time and space, under certain circumstances, are not dissociated and no longer can be interpreted as Euclidean. This paper provides an overview of research made on this field, while formally defining the key notions of spacetime and proper time. Further progression in this field does require a common ground of concepts and an understanding of how time dilation impacts financial models. For illustration purposes, we compute relativistic effects for option prices when viewed from the view point of two distinct reference frames, based upon the classical Balck-Scholes model. We show relativistic effects are non-negligible and illustrate how they depend on option characteristics such as maturity of the contract and volatility of the underlying.

Keywords: econophysics; spacetime finance; proper time; time dilation. (search for similar items in EconPapers)
JEL-codes: E43 G10 G12 G13 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp01752021

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