Physical concepts in finance

Hens · December 1st, 2006, 12:55 pm

In a couple of months I plan to give a talk to a bunch of atomic physicists on quantitative finance. It's part of an informal seminar series in 'topics of interest'. I intend to start by explaining how people use derivatives - princiapally I'll focus on reducing risk. I also plan to provide a quick derivation of BS (Hull's quick derivation to be precise!). Given this I'd really like to expose some aspects of derivatives with some connections to what people do in my group. Ok, so not laser interactions, but I've read about how genetic algorithms may be used to find trading strategies for example. I might also throw in a simple Monte Carlo pricing algorithm. Are there any good examples where famous physical principles may be used in finance?! In case you haven't guessed I'm still very much a student in all this(!).

ppauper · December 1st, 2006, 1:57 pm

perhaps a barrier option where you talk about the individual realisations crossing the barrier ?

AlanB · December 1st, 2006, 2:21 pm

QuoteOriginally posted by: HensIn a couple of months I plan to give a talk to a bunch of atomic physicists on quantitative finance. It's part of an informal seminar series in 'topics of interest'. I intend to start by explaining how people use derivatives - princiapally I'll focus on reducing risk. I also plan to provide a quick derivation of BS (Hull's quick derivation to be precise!). Given this I'd really like to expose some aspects of derivatives with some connections to what people do in my group. Ok, so not laser interactions, but I've read about how genetic algorithms may be used to find trading strategies for example. I might also throw in a simple Monte Carlo pricing algorithm. Are there any good examples where famous physical principles may be used in finance?! In case you haven't guessed I'm still very much a student in all this(!).Through a series of transformation, the Black Scholes can be reduced to the well know heat diffusion equation See the site http://en.wikipedia.org/wiki/Black-Scho ... choles_PDE

CompPDE · December 1st, 2006, 3:28 pm

you could talk about Hamiltonians and the way some people use them in finance - point to jan Dash's book, not very popular but physicists will relate to it

zeta · December 1st, 2006, 3:44 pm

you may this paper on field theory and finance helpful

Elmer · December 1st, 2006, 9:02 pm

You might have a look at some of these articlesWe use symmetries to derive BS etc in a very clean way, no martingales just tradeables etc.From a physicist's point of view much nicer :-)Jiri

Cuchulainn · December 1st, 2006, 9:10 pm

In your article number 3 (Tradeable) it is nice to see that you use fitted FDM scheme. Have you done any of this fitting in 2 factor? Not having to deal with drift would be (very) nice but does the technique hold for general securities?Edit: for the tradeable object fitting factor I get a value of(x ^2 * ( exp(sig^2 * k) - 1 ) / (2 * k)where x = S/Psig = volatilityk == deltaT = time stepand ^ is just squaring a numberIs this correct? I have not been able to find it in the article.

Maelo · December 2nd, 2006, 3:03 am

QuoteOriginally posted by: zetayou may this paper on field theory and finance helpfulCan't opened. Password protected. Any suggestion?M

torontosimpleguy · December 2nd, 2006, 3:56 am

QuoteOriginally posted by: ElmerYou might have a look at some of these articlesWe use symmetries to derive BS etc in a very clean way, no martingales just tradeables etc.From a physicist's point of view much nicer :-)JiriWhy did you put these articles under ''Condensed Matter"?

rcohen · December 4th, 2006, 11:40 am

QuoteOriginally posted by: Hens...Are there any good examples where famous physical principles may be used in finance?! What about the plain, old brownian motion?!

zeta · December 4th, 2006, 12:57 pm

sorry maelo et al, here's baaquie's papers at x archiv:preprints

Cuchulainn · December 6th, 2006, 12:10 pm

QuoteOriginally posted by: rcohenQuoteOriginally posted by: Hens...Are there any good examples where famous physical principles may be used in finance?! What about the plain, old brownian motion?!Is it also possible to motivate early exercise in this way as well? This is the free boundary and it is like a heat equation where a block of ice is melting in water. But is there an equally intuitive example with GBM?

N · December 6th, 2006, 5:10 pm

QuoteOriginally posted by: rcohenQuoteOriginally posted by: Hens...Are there any good examples where famous physical principles may be used in finance?! What about the plain, old brownian motion?!There's nothing plain or old about brownian motion unless you don't know what you're doing...N

rcohen · December 7th, 2006, 9:29 am

QuoteOriginally posted by: NThere's nothing plain or old about brownian motion unless you don't know what you're doing...N(1) It's plain because it's all around us and happening all the time, as air molecules transfer kinetic energy to suspended particles, making them shake randomly and incessantly and(2) it's old because it was discovered as a phenomenon in 1827 and first formalized and put into good practical use by Einstein more than a 100 years ago.Looks like you don't know what you're saying!

N · December 7th, 2006, 1:25 pm

QuoteOriginally posted by: rcohenQuoteOriginally posted by: NThere's nothing plain or old about brownian motion unless you don't know what you're doing...N(1) It's plain because it's all around us and happening all the time, as air molecules transfer kinetic energy to suspended particles, making them shake randomly and incessantly and(2) it's old because it was discovered as a phenomenon in 1827 and first formalized and put into good practical use by Einstein more than a 100 years ago.Looks like you don't know what you're saying!Yes, but the dynamics of those air or water molecules are neither plain or well understood, and one of Einstein's few major mistakes was his PhD paper on Browning motion. You see the Navier-Stokes PDE that governs the mass transport problem (Brownian motion) is still an open problem in mathematical-physics.I'd say you're a victim of 'folk' math.