Cutting edge introduction: perturbing the smile

There has been a long history of interaction between physics and quantitative finance. Now a technique for finding the effects of small fluctuations in quantum fields is being used to get a handle on the implied volatility smiles a stochastic model can create. Laurie Carver introduces this month’s technical articles

The bongo-drumming, wise-cracking, safe-cracking, theoretical physicist Richard Feynman understood quantum physics as well as anybody. However, that is not saying much, according to him. “I think I can safely say that nobody understands quantum mechanics,” he once said.

That a man whose advances in the field did so much to illuminate it – and who helped create arguably its most successful scientific theory ever in quantum electrodynamics – could be so resigned to its elusive character does not