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Relativistically into Finance

Author

Listed:
  • Vitor H. Carvalho
  • Raquel M. Gaspar

Abstract

The change of information near the light speed, advances in high-speed trading, spatial arbitrage strategies and foreseen space exploration, suggest the need to consider the effects of the theory of relativity into finance models. Time and space, under certain circumstances, are not dissociated and no longer can be interpreted as Euclidean. This paper provides an overview of research made on this field, while formally defining the key notions of spacetime and proper time. Further progression in this field does require a common ground of concepts and an understanding of how time dilation impacts financial models. For illustration purposes, we compute relativistic effects for option prices when viewed from the view point of two distinct reference frames, based upon the classical Balck-Scholes model. We show relativistic effects are non-negligible and illustrate how they depend on option characteristics such as maturity of the contract and volatility of the underlying.

Suggested Citation

  • Vitor H. Carvalho & Raquel M. Gaspar, 2021. "Relativistically into Finance," Working Papers REM 2021/0175, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp01752021
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    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_0175_2021.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    econophysics; spacetime finance; proper time; time dilation.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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