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Download Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management fb2, epub

by Marc Potters,Jean-Philippe Bouchaud

Download Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management fb2, epub

ISBN: 0521819164
Author: Marc Potters,Jean-Philippe Bouchaud
Language: English
Publisher: Cambridge University Press; 2 edition (February 2, 2004)
Pages: 400
Category: Mathematics
Subcategory: Science
Rating: 4.3
Votes: 610
Size Fb2: 1530 kb
Size ePub: 1228 kb
Size Djvu: 1598 kb
Other formats: lrf lrf mbr lit


This book summarizes recent theoretical developments inspired by statistical physics in the description of the potential moves in financial markets, and its application to derivative pricing and risk control. It takes a physicist's point of view to financial risk by comparing theory with experiment.

This book summarizes recent theoretical developments inspired by statistical physics in the description of the potential moves in financial markets, and its application to derivative pricing and risk control. Starting with important results in probability theory, the authors discuss the statistical analysis of real data, the empirical determination of statistical laws, the definition of risk, the theory of optimal portfolio, and the problem of derivatives (forward contracts, options).

Risk control and derivative pricing are major concerns to financial institutions. The need for adequate statistical tools to measure and anticipate amplitude of potential moves of financial markets is clearly expressed, in particular for derivative markets. Classical theories, however, are based on assumptions leading to systematic (sometimes dramatic) underestimation of risks.

I think the book tries to target people outside Statistical Physics, but unfortunately the notation has shunned some people away from the book

I think the book tries to target people outside Statistical Physics, but unfortunately the notation has shunned some people away from the book. I know the notation (just as Einstein's) is compact and elegant once you get it, but if on the first two chapters there were a "translation" of formulas in terms of sum operators and quotients, that would help people to climb up the learning curve much faster. Those additions could help non-physicist readers to understand those "stylised facts" of markets, especially when the ideas are very intuitive and should help question the mainstream approach in Finance and Economics

Jean-Philippe Bouchaud and Marc Potters. Jean-Philippe Bouchaud and Marc Potters 2000, 2003 Theory of financial risk and derivative pricing : from statistical physics to risk.

Jean-Philippe Bouchaud and Marc Potters. published by the press syndicate of the university of cambridge. The Pitt Building, Trumpington Street, Cambridge, United Kingdom. Jean-Philippe Bouchaud and Marc Potters 2000, 2003. Subject to statutory exception. Theory of financial risk and derivative pricing : from statistical physics to risk. management, Jean-Philippe Bouchaud and Marc Potters. 2nd edn. p. cm. Rev. edn of: Theory of financial risks. Includes bibliographical references and index.

Jean-Philippe Bouchaud, Marc Potters. Summarizing market data developments, some inspired by statistical physics, this book explains how to better predict the actual behavior of financial markets with respect to asset allocation, derivative pricing and hedging, and risk control. Risk control and derivative pricing are major concerns to financial institutions. Classical theories, however, are based on assumptions leading.

Potters, Marc, 1969-; Bouchaud, Jean-Philippe, 1962- Theory of financial risks. Books for People with Print Disabilities. Trent University Library Donation. Internet Archive Books. Uploaded by station09. cebu on March 26, 2019. SIMILAR ITEMS (based on metadata). Terms of Service (last updated 12/31/2014).

Risk control and derivative pricing have become of major concern to financial institutions, and there is. .

Risk control and derivative pricing have become of major concern to financial institutions, and there is a real need for adequate statistical tools to measure and anticipate the amplitude of the potential moves of the financial markets. He teaches statistical mechanics and finance in various Grandes Écoles, and has worked at CRNS and CEA-Saclay.

This book summarizes recent theoretical developments inspired by statistical physics in the description of the potential moves in financial markets, and its application to derivative pricing and risk control

This book summarizes recent theoretical developments inspired by statistical physics in the description of the potential moves in financial markets, and its application to derivative pricing and risk control. This book takes a physicist's point of view to financial risk by comparing theory with experiment.

From Statistical Physics to Risk Management. Theory of nancial risk and derivative pricing : from statistical physics to risk management, Jean-Philippe Bouchaud and Marc Potters. Jean-Philippe Bouchaud and Marc Potters. published by the press syndicate of the university of cambridge The Pitt Building, Trumpington Street, Cambridge, United Kingdom. 2nd edn p. edn of: Theory of nancial risks. ISBN 0 521 81916 4 (hardback).

Jean-Philippe Bouchaud, Marc Potters

Jean-Philippe Bouchaud, Marc Potters. Risk control and derivative pricing have become of major concern to financial institutions, and there is a real need for adequate statistical tools to measure and anticipate the amplitude of the potential moves of the financial markets. Additional chapters now cover stochastic processes, Monte-Carlo methods, Black-Scholes theory, the theory of the yield curve, and Minority Game. There are discussions on aspects of data analysis, financial products,.

Summarizing market data developments, some inspired by statistical physics, this book explains how to better predict the actual behavior of financial markets with respect to asset allocation, derivative pricing and hedging, and risk control. Risk control and derivative pricing are major concerns to financial institutions. The need for adequate statistical tools to measure and anticipate amplitude of potential moves of financial markets is clearly expressed, in particular for derivative markets. Classical theories, however, are based on assumptions leading to systematic (sometimes dramatic) underestimation of risks.

Comments:

Jarortr
Outstanding book, well worth the time to study carefully. Appreciate the emphasis on real world models/statistics rather than idealized approaches so prevalent elsewhere.
Kupidon
This text has a nice discussion of Levy distributions and (important!) discusses why the central limit theorem does not apply to the tails of a distribution in the limit of many independent random events. An exponential distribution is given as an example how the CLT fails. I was first happy to see a chapter devoted to portfolio selection, but the chapter (like most of the book) is very difficult to follow (I gave up on that chapter, unhappily, because it looked interesting). The notation could have been better (to be quite honest, the notation is horrible), and the arguments (many of which are original) could have been made sharper and clearer. For my taste, too many arguments in the text rely on uncontrolled approximations, with Gaussian results as special limiting cases. The chapters on options are original, introducing their idea of history-dependent strategies (however, to get a strategy other than the delta-hedge does not not require history-dependence, CAPM is an example), but the predictions too often go in the direction of showing how Gaussian returns can be retrieved in some limit (I find this the opposite of convincing!). For an introduction to options, the 1973 Black-Scholes paper is still the best (aside from the wrong claim that CAPM and the delta-hedge yield the same results). The argument in the introduction in favor of 'randomness' as the origin of macroscopic law left me as cold as a cucumber. On page 4 a density is called 'invariant' under change of variable whereas 'scalar' is the correct word (a common error in many texts on relativity). The explanation of Ito calculus is inventive but inadequate (see instead Baxter and Rennie for a correct and readable treatment, one the forms the basis for new research on local volatility). Also, utlility is once mentioned but never criticized. Had the book been more pedagogically written then one could well have used it as an introductory text, given the nice choice of topics discussed.
xander
This is one of my favourite books in Quantitative Finance.

I agree with Paul Wilmott's back cover comment that this book has a plethora of ideas. I have one on my desk and another at home, and I check them frequently for new ideas.

The Econophysics flavour is defended with elegance. It can be summarised as an approach based on empirical data, where there are not a priori assumptions on the distributions. In fact, this approach is more "scientific" than some dogmatic, axiom-based approaches in Economics like Efficient Market Theory or normality of returns. Moreover, checking directly the moments of the distribution is to my eyes more sincere than assuming X o Y distribution and fit its parameters. Of course, Statistical Physics may have a bias towards Lévy (i.e. power-law) distributions for the tails, but the authors prove that it is quite common to see this in real returns.

The most important thoughts in the book are:

* Returs are not normal, rather power-law on the tails
* Not only mean and variance are important: third and fourth moments (skewness and kurtosis) are crucial for risk management
* Using Taylor expansions on the empirical distributions we can estimate the first four moments or cumulants
* Returns exhibit auto-correlation at high frequencies (around seconds), which decays as a power law and eventually (after 30 mins) dissapears
* Correlograms (i.e. lagged auto-correlation) can help to understand the market impact of trades
* Random matrices can be used to assess cross-correlation in a very robust way
* Pricing formulas like Black-Scholes can be corrected with skewness and kurtosis, e.g. the smile and the delta

There is however a small negative point: its very difficult notation. I think the book tries to target people outside Statistical Physics, but unfortunately the notation has shunned some people away from the book. I know the notation (just as Einstein's) is compact and elegant once you get it, but if on the first two chapters there were a "translation" of formulas in terms of sum operators and quotients, that would help people to climb up the learning curve much faster.

I understand the book is a reference manual for seasoned professionals in Quantitative Finance, not a textbook. However, some extra pages to allow more explanations and examples would be nice for the next edition. Those additions could help non-physicist readers to understand those "stylised facts" of markets, especially when the ideas are very intuitive and should help question the mainstream approach in Finance and Economics.

I think the notation issue is important, but it can be overcome with patience. This in my opinion puts the rating of the book closer to 5 stars than to 4.

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