Price Measurement in Financial Markets and Quantum Coupled-Wave Theory of Price Formation
Abstract: We present a theory of bid and ask price dynamics where the two prices form as a result of quantum-chaotic interaction between buy and sell orders. In this model, the two prices are represented by eigenvalues of a 2x2 price operator corresponding to "bid" and "ask" eigenstates. We will present the trading process from a physics point of view, discuss how each trade represents an elementary act of price measurement and demonstrate how the theory is built from this argument. We will show that the coupled-wave theory reflects important characteristics of bid and ask price dynamics, link it to ergodic properties of the markets and discuss how they affect price formation. This theory opens a new dimension in financial modeling providing a framework for liquidity pricing, illiquidity risk evaluation, position management, as well as brings up an in-depth discussion about the nature of processes in financial markets.