From quantum mechanics to finance: Microfoundations for jumps, spikes and high volatility phases in diffusion price processes

Abstract: We present an agent behavior based microscopic model that induces jumps, spikes and high volatility phases in the price process of a traded asset. We transfer dynamics of thermally activated jumps of an unexcited/ excited two state system discussed in the context of quantum mechanics to agent socio-economic behavior and provide microfoundations. After we link the endogenous agent behavior to price dynamics we establish the circumstances under which the dynamics converge to an It^o-diffusion price processes in the large market limit.