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Bonds with index-linked stochastic coupons in quantum finance

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  • Baaquie, Belal Ehsan

Abstract

An index-linked coupon bond is defined that pays coupons whose values are stochastic, depending on a market defined index. This is an asset class distinct from the existing coupon bonds. The index-linked coupon bond is an example of a sukuk, which is an instrument that implements one of the cornerstones of Islamic finance (Askari et al., 2012): that an investor must share in the risk of the issuer in order to earn profits from the investment. The index-linked coupon bond is defined using the mathematical framework of quantum finance (Baaquie, 2004, 2010). The coupons are stochastic, with the quantum of coupon payments depending on a publicly traded index that is chosen to reflect the primary drivers of the revenues of the issuer of the bond. The index ensures there is information symmetry – regarding the quantum of coupon being paid – between issuer and investor. The dependence of the coupon on the index is designed so that the variation of the index mirrors the changing fortunes of the issuer, with the coupon’s quantum increasing for increasing values of the index and conversely, decreasing with a fall of the index.

Suggested Citation

  • Baaquie, Belal Ehsan, 2018. "Bonds with index-linked stochastic coupons in quantum finance," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 499(C), pages 148-169.
    • Handle: RePEc:eee:phsmap:v:499:y:2018:i:c:p:148-169
    DOI: 10.1016/j.physa.2018.02.003
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    References listed on IDEAS

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    1. Baaquie, Belal E. & Liang, Cui, 2007. "Pricing American options for interest rate caps and coupon bonds in quantum finance," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 381(C), pages 285-316.
    2. Mantegna,Rosario N. & Stanley,H. Eugene, 2007. "Introduction to Econophysics," Cambridge Books, Cambridge University Press, number 9780521039871, September.
    3. Baaquie, Belal E. & Yu, Miao & Du, Xin, 2016. "Multiple commodities in statistical microeconomics: Model and market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 462(C), pages 912-929.
    4. Baaquie, Belal E. & Cao, Yang, 2014. "Option volatility and the acceleration Lagrangian," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 393(C), pages 337-363.
    5. Baaquie, Belal E. & Du, Xin & Bhanap, Jitendra, 2014. "Option pricing: Stock price, stock velocity and the acceleration Lagrangian," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 416(C), pages 564-581.
    6. Bouchaud,Jean-Philippe & Potters,Marc, 2003. "Theory of Financial Risk and Derivative Pricing," Cambridge Books, Cambridge University Press, number 9780521819169, September.
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    Cited by:

    1. Belal Ehsan Baaquie & Muhammad Mahmudul Karim, 2024. "Corporate bonds: fixed versus stochastic coupons—an empirical study," Journal of Asset Management, Palgrave Macmillan, vol. 25(1), pages 113-128, February.
    2. Baaquie, Belal Ehsan, 2020. "Merton’s equation and the quantum oscillator: Pricing risky corporate coupon bonds," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 541(C).
    3. Haoran Zheng & Bo Dong, 2024. "Quantum Temporal Winds: Turbulence in Financial Markets," Mathematics, MDPI, vol. 12(10), pages 1-28, May.

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