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The Journal of Derivatives

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Quantum Option Pricing and Quantum Finance

Sergio Focardi, Frank J. Fabozzi and Davide Mazza
The Journal of Derivatives Fall 2020, jod.2020.1.111; DOI: https://doi.org/10.3905/jod.2020.1.111
Sergio Focardi
is a professor of finance at Léonard de Vinci Pôle Universitaire in Paris, France
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Frank J. Fabozzi
is a professor of finance at EDHEC Business School in Nice, France
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Davide Mazza
is a professor of finance at Léonard de Vinci Pôle Universitaire in Paris, France
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Abstract

In this article, the authors discuss the use of quantum probability, that is, the probability theory of quantum mechanics, for option pricing and for finance in general. The authors discuss the motivations for applying quantum probability to finance. The critical issues are replacing random variables with operators, self-reflexivity of markets, and the existence of incompatible observations. The authors outline quantum probability theory, quantum stochastic processes, and the pricing of options in a quantum context.

TOPICS: Options, portfolio theory, portfolio construction

Key Findings

  • • Quantum probability theory is a probabilistic theory of observations. Observations can change the system and be incompatible.

  • • Quantum probability offers a more empirically faithful handling of large events and of uncertainty.

  • • A better theory of valuation is offered by quantum probability theory than classical probability theory.

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The Journal of Derivatives: 28 (3)
The Journal of Derivatives
Vol. 28, Issue 3
Spring 2021
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Quantum Option Pricing and Quantum Finance
Sergio Focardi, Frank J. Fabozzi, Davide Mazza
The Journal of Derivatives May 2020, jod.2020.1.111; DOI: 10.3905/jod.2020.1.111

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Quantum Option Pricing and Quantum Finance
Sergio Focardi, Frank J. Fabozzi, Davide Mazza
The Journal of Derivatives May 2020, jod.2020.1.111; DOI: 10.3905/jod.2020.1.111
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  • Article
    • Abstract
    • SCOPE OF THE PRESENT WORK
    • THE SCIENTIFIC FRAMEWORK
    • QUANTUM PROBABILITY
    • QUANTIZATION, BINOMIAL MODELS
    • QUANTUM STOCHASTIC PROCESSES AND THE QUANTUM BLACK-SCHOLES FORMULA
    • QUANTUM OPTION PRICING AND QUANTUM ASSET PRICING THEORY
    • CONCLUSION
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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