Modeling stock return distributions with a quantum harmonic oscillator. (29th January 2018)

• Record Type: Journal Article
• Authors: Ahn, K.; Choi, M. Y.; Dai, B.; Sohn, S.; Yang, B.
• Is Part Of: Europhysics letters. Volume 120:Number 3(2017:Nov.)
• Publication Date: 2018-01-29
• Subjects: 89.65.Gh -- 05.10.Gg -- 89.65.-s; Physics -- Periodicals; Electronic journals; 530.05
• DOI: 10.1209/0295-5075/120/38003
• Languages: English
• ISSNs: 0295-5075

Abstract

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.