A quantum model for the overpriced put puzzle

Abstract Put options are known to be priced unusually high in the market, which we refer to as the overpriced put puzzle . This study proposes a quantum model (QM) that can explain such high put option prices as fair prices. Starting from a stochastic differential equation of stock returns, we convert the Fokker–Planck equation into the Schrödinger equation. To model the market force that always draws excess returns back to equilibrium, we specify a diffusion process corresponding to a QM with a delta potential. The results demonstrate that stock returns follow a Laplace distribution and exhibit power law in the tail. We then construct a closed-form solution for European put option pricing, determining that our model better explains the returns of the S&P 500 index and its corresponding put option prices than do geometric Brownian motion-based models. This study has significant implications for investors and risk managers, presenting a model that can potentially improve derivative pricing. Future studies can generalize the model assumptions by introducing asymmetric potential drawing back excess returns to equilibrium.