A Quantum Field Theory Term Structure Model Applied to Hedging

DOI10.1142/S0219024903001980MaRDI QIDQ5696861zbMATH OpenFDO

Authors Marakani Srikant, Mitch Warachka, Belal E. Baaquie

Publication date 19 October 2005

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cond-mat/0206457

zbMATH Keywords

bond portfoliofield theory modelhedgingvariance minimization

Mathematics Subject Classification ID

Foundations, quantum information and its processing, quantum axioms, and philosophy (81P99)

Abstract: A quantum field theory generalization, Baaquie, of the Heath, Jarrow, and Morton (HJM) term structure model parsimoniously describes the evolution of imperfectly correlated forward rates. Field theory also offers powerful computational tools to compute path integrals which naturally arise from all forward rate models. Specifically, incorporating field theory into the term structure facilitates hedge parameters that reduce to their finite factor HJM counterparts under special correlation structures. Although investors are unable to perfectly hedge against an infinite number of term structure perturbations in a field theory model, empirical evidence using market data reveals the effectiveness of a low dimensional hedge portfolio.

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Cites work

• AN EMPIRICAL INVESTIGATION OF THE FORWARD INTEREST RATE TERM STRUCTURE
• Bond Market Structure in the Presence of Marked Point Processes
• Characterizing Gaussian Models of the Term Structure of Interest Rates
• Interest rate dynamics and consistent forward rate curves
• Phenomenology of the interest rate curve
• THE TERM STRUCTURE OF INTEREST RATES AS A GAUSSIAN RANDOM FIELD

Cited in

(6)

• Merton's equation and the quantum oscillator: pricing risky corporate coupon bonds
• The term structure of credit spread based on quantum field theory
• Preferences (partial pre-orders) on complex numbers -- in view of possible use in quantum econometrics
• Pricing of stock linked structured products based on quantum field theory
• Quantum Finance
• Why Bohmian approach to quantum econometrics: an algebraic explanation

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