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Physics of Finance

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  • Kirill Ilinski

Abstract

We give a brief introduction to the Gauge Theory of Arbitrage. Treating a calculation of Net Present Values (NPV) and currencies exchanges as a parallel transport in some fibre bundle, we give geometrical interpretation of the interest rate, exchange rates and prices of securities as a proper connection components. This allows us to map the theory of capital market onto the theory of quantized gauge field interacted with a money flow field. The gauge transformations of the matter field correspond to a dilatation of security units which effect is eliminated by a gauge transformation of the connection. The curvature tensor for the connection consists of the excess returns to the risk-free interest rate for the local arbitrage operation. Free quantum gauge theory is equivalent to the assumption about the log-normal walks of assets prices. In general case the consideration maps the capital market onto lattice QED.

Suggested Citation

  • Kirill Ilinski, 1997. "Physics of Finance," Papers hep-th/9710148, arXiv.org.
  • Handle: RePEc:arx:papers:hep-th/9710148
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