Volker Ziemann - Physics and Finance

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One fine day, my son, who was studying economics at the time, brought along books on the use of stochastic differential equations in finance. Following a dialog along the lines of Oh, I know that, its a Fokker-Planck equation---No dad, thats Black-Scholes, I got curious. After all, there might be some fun in economics and finance, besides the money. So, I borrowed Hulls book about the basics of financial economics, because I wanted to understand the basic concepts and the lingo. Just looking through the book, I recognized those differential equations that look so similar to a diffusion equation with a drift term. So, I set out to understand what finance has to do with diffusion.

I later presented some lectures about my explorations to a few interested students and colleagues, which was very stimulating and caused me to explore the subject further. That was how the later chapters came about. They all deal with some aspect of random processes and have some overlap between physics, finance, and other neighboring disciplines.

At that point, I prepared a 5 ECTS (European transfer credits) lecture series for masters students at Uppsala University and expanded the manuscript to serve as lecture notes for this course, which ran for the first time in the spring of 2019, with about 15 interested students. The feedback after the course was rather positive such that I gave the course again in the spring of 2020. This time with 24 students, who provided much more feedback and criticism, which caused me to revise parts of the manuscript to bring it to its present form.

Obviously, many people helped to improve the manuscript. First, I have to thank my son Ingvar. He stimulated my interest in finance and also critically read parts of the manuscript. Likewise, I am indebted to my colleagues and the students who participated in the early lectures and in the course later. Many of them gave valuable criticism and feedback on the growing manuscript. I want to single out a few students, who were particularly diligent: Joe and Martin from the course in 2019; Friedrich, Sebastian, and Elias from 2020. They helped me weed out many ambiguities and errors. They are, however, not to blame for any remaining bugs, those are my responsibility alone. I also need to thank our director of studies, Lisa Freyhult, for her support at the faculty to include this course in the curriculum. Finally, I want to thank my family for their patience with me when I was a bit overfocused on the manuscript.