The Statistical Mechanics of Financial Markets

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Springer Science & Business Media, Oct 21, 2005 - Business & Economics - 378 pages

This highly praised introductory treatment describes the parallels between statistical physics and finance - both those established in the 100-year long interaction between these disciplines, as well as new research results on financial markets.

The random-walk technique, well known in physics, is also the basic model in finance, upon which are built, for example, the Black-Scholes theory of option pricing and hedging, plus methods of portfolio optimization. Here the underlying assumptions are assessed critically. Using empirical financial data and analogies to physical models such as fluid flows, turbulence, or superdiffusion, the book develops a more accurate description of financial markets based on random walks. With this approach, novel methods for derivative pricing and risk management can be formulated. Computer simulations of interacting-agent models provide insight into the mechanisms underlying unconventional price dynamics. It is shown that stock exchange crashes can be modelled in ways analogous to phase transitions and earthquakes, and sometimes have even been predicted successfully.

This third edition of The Statistical Mechanics of Financial Markets especially stands apart from other treatments because it offers new chapters containing a practitioner's treatment of two important current topics in banking: the basic notions and tools of risk management and capital requirements for financial institutions, including an overview of the new Basel II capital framework which may well set the risk management standards in scores of countries for years to come.

 

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Contents

I
1
II
4
III
6
IV
8
V
12
VI
15
VII
19
VIII
20
XXXVII
204
XXXVIII
208
XXXIX
210
XL
216
XLI
221
XLIII
222
XLIV
226
XLV
246

IX
21
X
27
XII
28
XIII
41
XIV
44
XV
51
XVII
52
XVIII
53
XIX
58
XX
72
XXI
100
XXIII
102
XXIV
106
XXV
120
XXVI
131
XXVII
146
XXVIII
173
XXXI
182
XXXII
197
XXXV
199
XXXVI
200
XLVI
258
XLVIII
260
XLIX
264
L
270
LI
276
LII
278
LIII
279
LIV
285
LV
289
LVII
290
LVIII
291
LIX
308
LX
314
LXI
325
LXIII
326
LXIV
333
LXV
359
LXVI
365
LXVII
374
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