Modeling stock return distributions with a quantum harmonic oscillator

Kwangwon Ahn, MooYoung Choi, Bingcun Dai, Sungbin Sohn, Biao Yang

Research output: Contribution to journal › Article

4 Citations (Scopus)

Abstract

We propose a quantum harmonic oscillator as a model for the market force which draws a stock return from short-run fluctuations to the long-run equilibrium. The stochastic equation governing our model is transformed into a Schrödinger equation, the solution of which features "quantized" eigenfunctions. Consequently, stock returns follow a mixed χ distribution, which describes Gaussian and non-Gaussian features. Analyzing the Financial Times Stock Exchange (FTSE) All Share Index, we demonstrate that our model outperforms traditional stochastic process models, e.g., the geometric Brownian motion and the Heston model, with smaller fitting errors and better goodness-of-fit statistics. In addition, making use of analogy, we provide an economic rationale of the physics concepts such as the eigenstate, eigenenergy, and angular frequency, which sheds light on the relationship between finance and econophysics literature.
Original languageEnglish
JournalEPL
Volume120
Issue number3
Publication statusPublished - 2017

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harmonic oscillators
eigenvectors
finance
goodness of fit
stochastic processes
economics
statistics
physics

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Ahn, K., Choi, M., Dai, B., Sohn, S., & Yang, B. (2017). Modeling stock return distributions with a quantum harmonic oscillator. EPL, 120(3).
Ahn, Kwangwon ; Choi, MooYoung ; Dai, Bingcun ; Sohn, Sungbin ; Yang, Biao. / Modeling stock return distributions with a quantum harmonic oscillator. In: EPL. 2017 ; Vol. 120, No. 3.
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Ahn, K, Choi, M, Dai, B, Sohn, S & Yang, B 2017, 'Modeling stock return distributions with a quantum harmonic oscillator', EPL, vol. 120, no. 3.

Modeling stock return distributions with a quantum harmonic oscillator. / Ahn, Kwangwon; Choi, MooYoung; Dai, Bingcun; Sohn, Sungbin; Yang, Biao.

In: EPL, Vol. 120, No. 3, 2017.

Research output: Contribution to journal › Article

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AU - Ahn, Kwangwon

AU - Choi, MooYoung

AU - Dai, Bingcun

AU - Sohn, Sungbin

AU - Yang, Biao

PY - 2017

Y1 - 2017

N2 - We propose a quantum harmonic oscillator as a model for the market force which draws a stock return from short-run fluctuations to the long-run equilibrium. The stochastic equation governing our model is transformed into a Schrödinger equation, the solution of which features "quantized" eigenfunctions. Consequently, stock returns follow a mixed χ distribution, which describes Gaussian and non-Gaussian features. Analyzing the Financial Times Stock Exchange (FTSE) All Share Index, we demonstrate that our model outperforms traditional stochastic process models, e.g., the geometric Brownian motion and the Heston model, with smaller fitting errors and better goodness-of-fit statistics. In addition, making use of analogy, we provide an economic rationale of the physics concepts such as the eigenstate, eigenenergy, and angular frequency, which sheds light on the relationship between finance and econophysics literature.

AB - We propose a quantum harmonic oscillator as a model for the market force which draws a stock return from short-run fluctuations to the long-run equilibrium. The stochastic equation governing our model is transformed into a Schrödinger equation, the solution of which features "quantized" eigenfunctions. Consequently, stock returns follow a mixed χ distribution, which describes Gaussian and non-Gaussian features. Analyzing the Financial Times Stock Exchange (FTSE) All Share Index, we demonstrate that our model outperforms traditional stochastic process models, e.g., the geometric Brownian motion and the Heston model, with smaller fitting errors and better goodness-of-fit statistics. In addition, making use of analogy, we provide an economic rationale of the physics concepts such as the eigenstate, eigenenergy, and angular frequency, which sheds light on the relationship between finance and econophysics literature.

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JO - Europhysics Letters

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Ahn K, Choi M, Dai B, Sohn S, Yang B. Modeling stock return distributions with a quantum harmonic oscillator. EPL. 2017;120(3).