Quantum mechanism of price stabilization in financial markets

We study the mechanism of price stabilization in financial instruments using the quantum coupled-wave model and show that security mispricing results in persistent execution imbalance, which drives the price towards its fair value. In the course of stabilization the bid-ask spread widens, which is in agreement with observed market data. If initial mispricing is large, price may exhibit oscillatory behavior as the normally present random phase jumps are suppressed. This also is a widely observed empirical pattern. When the fair price is achieved, imbalance stabilizes at zero value and fluctuates around it. These fluctuations are smaller for highly liquid securities, and larger for less liquid securities, which shows that liquid securities are less tolerable to mispricing. This behaviour is again in agreement with market data. These results show that price stabilization can be viewed as a quantum-chaotic process resulting from balance between buyers and sellers quoting prices on different bid and ask levels, rather than agreeing on a single price, as is widely believed in the economic supply-demand balance paradigm.