Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management

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Cambridge University Press, Dec 11, 2003 - Business & Economics - 379 pages
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. Summarising theoretical developments in the field, this 2003 second edition has been substantially expanded. 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, non-linear correlations, and herding, feedback and agent based models. This book has become a classic reference for graduate students and researchers working in econophysics and mathematical finance, and for quantitative analysts working on risk management, derivative pricing and quantitative trading strategies.
 

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Contents

basic notions
1
Maximum and addition of random variables
17
Continuous time limit Ito calculus and path integrals
43
Analysis of empirical data
55
Financial products and financial markets
69
basic results
87
Nonlinear correlations and volatility fluctuations
107
Skewness and pricevolatility correlations
130
fundamental concepts
226
kurtosis
242
hedging and residual risk
254
the role of drift and correlations
276
the Black and Scholes model
290
some more specific problems
300
minimum variance MonteCarlo
317
The yield curve
334

Crosscorrelations
145
Risk measures
168
Extreme correlations and variety
186
Optima portfolios
202
Simple mechanisms for anomalous price statistics
355
Index of most important symbols
372
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About the author (2003)

Jean-Philippe Bouchaud co-founded the company Science & Finance, which merged with Capital Fund Management (CFM) in 2000, where he now supervises the research team with Marc Potters. He teaches statistical mechanics and finance in various Grandes Écoles, and has worked at CRNS and CEA-Saclay. He was awarded the CRNS Silver Medal in 1996.

Marc Potters has been Head of Research at CFM since 1998, where he supervises thirty physics PhD's. He has published numerous articles in the new field of statistical finance, in particular on Random Matrix Theory applied to portfolio management. He works on various concrete applications of financial forecasting, option pricing and risk control.

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