Uncertain Volatility Models - Theory and Application - Softcover

Buff, Robert

Softcover

ISBN 10: 3540426574 ISBN 13: 9783540426578

Publisher: Springer, 2002

Synopsis

This book introduces Uncertain Volatility Models in mathematical finance. Uncertain Volatility Models evaluate option portfolios under worst- and best-case scenarios when the volatility coefficient of the pricing model cannot be determined exactly. The user defines subjective volatility constraints; within those constraints, extremal prices are computed. This book studies two types of constraints: volatility bands with upper and lower bounds, and shock scenarios with short periods of extreme volatility, but unkown timing. Uncertain Volatility Models are nonlinear. Worst- and best-case scenarios applied to isolated option positions do not always lead to the same extremal volatility. When applied to an options portfolio, a diversification effect reduces the overall exposure to volatility fluctuations within the subjective constraints. This book explores algorithmic issues that arise due to nonlinearity. Because Uncertain Volatility Models must be applied to option portfolios as a whole, they are difficult to implement on a computer if the portfolio contains barrier or American options. The accompanying CD contains a C++ implementation of Uncertain Volatility Models in source code. The software prices portfolios of vanilla, barrier and American options. This book is for graduate students, researchers and practitioners who wish to study advanced aspects of volatility risk in portfolios of vanilla and exotic options.

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Review:

From the reviews:

MATHEMATICAL REVIEWS

"The book bridges theory and real-world problems in a clear and pragmatic fashion. It can be useful both for academics and professionals in the financial community."

"This book, which comes out of the author’s Ph.D. thesis, introduces uncertain volatility models. ... The formal results are illustrated by many empirical examples. ... The book bridges theory and real-world problems in a clear and pragmatic fashion. It can be useful both for academics and for professionals in the financial community." (Damir Filipovic, Mathematical Reviews, 2003 i)

"The book is devoted to the study of uncertain volatility models that evaluate option portfolios ... . The author travels in this book the entire road from innovative mathematical finance to a working software system ... . Practitioners and students who need to build analytic software libraries may benefit from reading this book ... . This book is also for graduate students and researchers who wish to study advanced aspects of volatility risk in portfolios of vanilla and exotic options." (Anatoliy Swishchuk, Zentralblatt MATH, Vol. 1004 (4), 2003)

About this edition

• Publisher: Springer
• Publication date: 2002
• ISBN 10: 3540426574
• ISBN 13: 9783540426578
• Binding: Paperback
• Number of pages: 256