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Path Integral and Asset Pricing

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  • Zura Kakushadze

Abstract

We give a pragmatic/pedagogical discussion of using Euclidean path integral in asset pricing. We then illustrate the path integral approach on short-rate models. By understanding the change of path integral measure in the Vasicek/Hull-White model, we can apply the same techniques to "less-tractable" models such as the Black-Karasinski model. We give explicit formulas for computing the bond pricing function in such models in the analog of quantum mechanical "semiclassical" approximation. We also outline how to apply perturbative quantum mechanical techniques beyond the "semiclassical" approximation, which are facilitated by Feynman diagrams.

Suggested Citation

  • Zura Kakushadze, 2014. "Path Integral and Asset Pricing," Papers 1410.1611, arXiv.org, revised Aug 2016.
    • Handle: RePEc:arx:papers:1410.1611
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    References listed on IDEAS

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