THE USE OF NEGATIVE PROBABILITIES IN ECONOMICS

CURCA Sorin-Nicolae, School of Advanced Studies of the Romanian Academy (SCOSAAR), Institute for World Economy, the Romanian Academy

Abstract:
The concept of „negative probability” has become one of interest in research. Initially developed in connection with physics (negative probabilities are important in the analysis of quantum phenomena), nowadays it has applications in many other scientific disciplines. Its main advantage is that it extends the classical probability theory, which involves values between 0 and 1, allowing negative or supraunitary values. From this point of view, negative probabilities are a useful tool that facilitates the calculation and makes analysis more flexible through models. This paper aims to present the theoretical framework, the principles in relation to which the use of negative probabilities in economics, in general, can be understood. The existing literature highlights that the negative probabilities are appropriate in the analysis of stochastic processes and, from this perspective, has developed applications especially in the field of finance. In this sense, negative probabilities are used in models such as the binomial CRR model (The Cox-Ross-Rubinstein Market Model), that evaluate the price of derivatives on the capital market, those that include hidden variable (non-observable) etc. In our analysis we describe these models and, based on them, we try to identify the features of the negative probabilities that can be used in the economic field. The research is a theoretical one, leading the way for new approaches in the direction of using negative probabilities in macroeconomic modelling.

Keywords: negative probabilities, economics, CRR model, negative interest

JEL Classification: F13, F52, F62

Volume: 74, Issue: 1

Pages: 65 - 74

Publication date: August, 2022

DOI: 10.56043/reveco-2022-0005

Download the article: http://economice.ulbsibiu.ro/revista.economica/archive/74105curca.pdf

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