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Author (up) Bustamante, M.; Contreras, M. pdf  doi
  Title Multi-asset Black-Scholes model as a variable second class constrained dynamical system Type Journal Article
  Year 2016 Publication Physica A-Statistical Mechanics And Its Applications Abbreviated Journal Physica A  
  Volume 457 Issue Pages 540-572  
  Keywords Multiasset Black-Scholes equation; Option pricing; Singular Lagrangian systems; Dirac's method; Propagators; Constrained Hamiltonian path integrals  
  Abstract In this paper, we study the multi-asset Black-Scholes model from a structural point of view. For this, we interpret the multi-asset Black-Scholes equation as a multidimensional Schrodinger one particle equation. The analysis of the classical Hamiltonian and Lagrangian mechanics associated with this quantum model implies that, in this system, the canonical momentums cannot always be written in terms of the velocities. This feature is a typical characteristic of the constrained system that appears in the high-energy physics. To study this model in the proper form, one must apply Dirac's method for constrained systems. The results of the Dirac's analysis indicate that in the correlation parameters space of the multi assets model, there exists a surface (called the Kummer surface Sigma(K), where the determinant of the correlation matrix is null) on which the constraint number can vary. We study in detail the cases with N = 2 and N = 3 assets. For these cases, we calculate the propagator of the multi-asset Black-Scholes equation and show that inside the Kummer Sigma(K) surface the propagator is well defined, but outside Sigma(K) the propagator diverges and the option price is not well defined. On Sigma(K) the propagator is obtained as a constrained path integral and their form depends on which region of the Kummer surface the correlation parameters lie. Thus, the multi-asset Black-Scholes model is an example of a variable constrained dynamical system, and it is a new and beautiful property that had not been previously observed. (C) 2016 Elsevier B.V. All rights reserved.  
  Address [Bustamante, M.; Contreras, M.] Univ Adolfo Ibanez, Fac Ingn & Ciencias, Santiago, Chile, Email:  
  Corporate Author Thesis  
  Publisher Elsevier Science Bv Place of Publication Editor  
  Language English Summary Language Original Title  
  Series Editor Series Title Abbreviated Series Title  
  Series Volume Series Issue Edition  
  ISSN 0378-4371 ISBN Medium  
  Area Expedition Conference  
  Notes WOS:000376693600051 Approved no  
  Call Number UAI @ eduardo.moreno @ Serial 631  
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