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

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Finance is a rapidly expanding field of science, with a rather unique link to applications.
Correspondingly, recent years have witnessed the growing role of financial engineering in
market rooms. The possibility of easily accessing and processing huge quantities of data
on financial markets opens the path to new methodologies, where systematic comparison
between theories and real data not only becomes possible, but mandatory. This perspective
has spurred the interest of the statistical physics community, with the hope that methods and
ideas developed in the past decades to deal with complex systems could also be relevant in
finance. Many holders of PhDs in physics are now taking jobs in banks or other financial
institutions.

The existing literature roughly falls into two categories: either rather abstract books from
the mathematical finance community, which are very difficult for people trained in natural
sciences to read, or more professional books, where the scientific level is often quite poor.†
Moreover, even in excellent books on the subject, such as the one by J. C. Hull, the point
of view on derivatives is the traditional one of Black and Scholes, where the whole pricing
methodology is based on the construction of riskless strategies. The idea of zero-risk is
counter-intuitive and the reason for the existence of these riskless strategies in the Black–
Scholes theory is buried in the premises of Ito’s stochastic differential rules.

Recently, a handful of books written by physicists, including the present one,‡ have tried
to fill the gap by presenting the physicists’ way of approaching scientific problems. The
difference lies in priorities: the emphasis is less on rigour than on pragmatism, and no
theoretical model can ever supersede empirical data. Physicists insist on a detailed comparison
between ‘theory’ and ‘experiments’ (i.e. empirical results, whenever available), the art
of approximations and the systematic use of intuition and simplified arguments.
Indeed, it is our belief that a more intuitive understanding of standard mathematical
theories is needed for a better training of scientists and financial engineers in charge of
financial risks and derivative pricing. The models discussed in Theory of Financial Risk
and Derivative Pricing aim at accounting for real markets statistics where the construction of
riskless hedges is generally impossible and where the Black–Scholes model is inadequate.
The mathematical framework required to deal with these models is however not more
complicated, and has the advantage of making the issues at stake, in particular the problem
of risk, more transparent.

Much activity is presently devoted to create and develop new methods to measure and
control financial risks, to price derivatives and to devise decision aids for trading. We have
ourselves been involved in the construction of risk control and option pricing softwares for
major financial institutions, and in the implementation of statistical arbitrage strategies for
the company Capital Fund Management. This book has immensely benefited from the
constant interaction between theoretical models and practical issues. We hope that the
content of this book can be useful to all quants concerned with financial risk control and
derivative pricing, by discussing at length the advantages and limitations of various statistical
models and methods.

Finally, from a more academic perspective, the remarkable stability across markets and
epochs of the anomalous statistical features (fat tails, volatility clustering) revealed by the
analysis of financial time series begs for a simple, generic explanation in terms of agent
based models. This had led in the recent years to the development of the rich and interesting
models which we discuss. Although still in their infancy, these models will become, we
believe, increasingly important in the future as they might pave the way to more ambitious
models of collective human activities.

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Ketersediaan

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Informasi Detail

Judul Seri

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No. Panggil

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Penerbit

Cambridge : Cambridge University Press., 2003

Deskripsi Fisik

xx, 379 Hlm.

Bahasa

English

ISBN/ISSN

978-0-511-06151-6

Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

2nd ed.

Subjek

TEORI KEUANGAN
RESIKO KEUANGAN

Info Detail Spesifik

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Pernyataan Tanggungjawab

agus

Versi lain/terkait

Lampiran Berkas

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