Path Integral and Asset Pricing Zura Kakushadze§†1 § Quantigicr Solutions LLC 1127 High Ridge Road #135, Stamford, CT 06905 2 † Free University of Tbilisi, Business School & School of Physics 240, David Agmashenebeli Alley, Tbilisi, 0159, Georgia (October 6, 2014; revised: February 20, 2015) Abstract We give a pragmatic/pedagogical discussion of using Euclidean path in- tegral 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 for- mulas 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 “semiclas- sical” approximation, which are facilitated by Feynman diagrams. arXiv:1410.1611v4 [q-fin.MF] 10 Aug 2016 1 Zura Kakushadze, Ph.D., is the President of Quantigicr Solutions LLC, and a Full Professor at Free University of Tbilisi. Email:
[email protected] 2 DISCLAIMER: This address is used by the corresponding author for no purpose other than to indicate his professional affiliation as is customary in publications. In particular, the contents of this paper are not intended as an investment, legal, tax or any other such advice, and in no way represent views of Quantigic Solutions LLC, the website www.quantigic.com or any of their other affiliates. 1 Introduction In his seminal paper on path integral formulation of quantum mechanics, Feynman (1948) humbly states: “The formulation is mathematically equivalent to the more usual formulations.