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Quantum Dynamics approach for non-linear Black-Scholes option pricing
  • Marcin Wróblewski,
  • Andrzej Myślinski
Marcin Wróblewski
Instytut Badan Systemowych Polskiej Akademii Nauk

Corresponding Author:[email protected]

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Andrzej Myślinski
Instytut Badan Systemowych Polskiej Akademii Nauk
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Abstract

Option pricing models are formulated based on mathematical theories. They are applied to estimate the fair value of an option. Among different pricing models, the linear Black-Scholes equation is very frequently used as option pricing model. Since assumptions of this linear model do not match precisely the real market conditions and do not allow to estimate the option price precisely there are developed more complicated non-linear Black-Scholes option pricing models. In these models volatility of underlying asset price or market risk free interest rate are assumed stochastic or time dependent. Moreover transaction costs are also taken into account. Quantum mechanics provides other approach to calculate option values using non-linear models. This approach is based on the similarity between the evolution of elementary particles in space and the volatility of the stock prices. In previous paper the authors have proposed non-linear Black-Scholes model to calculate option price based on quantum dynamics approach. This model has been obtained by suitable transformation of variables in non-linear Schrödinger equation with the external potential term. In this paper the non-linear quantum based option pricing model is numerically tested and verified. Based on this model, the calculation of European, Asian and American call option prices for market data is provided. The model parameters, especially the adaptive market potential, have been estimated based on market prices of European call options listed on Warsaw Stock Exchange as well as American call options prices based on the selected NYSE stock prices. The sensitivity of this model with respect to risk free interest rate has been investigated. For the sake of comparison non-linear Heston option pricing model has been also solved and calibrated using Monte Carlo method. The comparison of option pricing using the developed quantum based model, linear Black-Scholes model, Heston model, indicates higher precision and lower computational costs of the proposed enhanced non-linear model.