Multiscale Stochastic Volatility for Equity, Interest Rate, and Credit Derivatives

Building upon the ideas introduced in their previous book, Derivatives in Financial Markets with Stochastic Volatility, the authors study the pricing and hedging of financial derivatives under stochastic volatility in equity, interest-rate, and credit markets. They present and analyze multiscale stochastic volatility models and asymptotic approximations. These can be used in equity markets, for instance, to link the prices of path-dependent exotic instruments to market implied volatilities. The methods are also used for interest rate and credit derivatives. Other applications considered include variance-reduction techniques, portfolio optimization, forward-looking estimation of CAPM “beta,” and the Heston model and generalizations of it. “Off-the-shelf” formulas and calibration tools are provided to ease the transition for practitioners who adopt this new method. The attention to detail and explicit presentation make this also an excellent text for a graduate course in financial and applied mathematics.

Jean-Pierre Fouque studied at the University Pierre and Marie Curie in Paris. He held positions at the French CNRS and École Polytechnique, and at North Carolina State University. Since 2006, he has been Professor and Director of the Center for Research in Financial Mathematics and Statistics at the University of California, Santa Barbara.

George Papanicolaou was Professor of Mathematics at the Courant Institute before moving to Stanford University in 1993. He is now Robert Grimmett Professor in the Department of Mathematics at Stanford.

Ronnie Sircar taught for three years at the University of Michigan in the Department of Mathematics before moving to Princeton University in 2000. He is now a Professor in the Operations Research and Financial Engineering Department at Princeton and an affiliate member of the Bendheim Center for Finance and the Program in Applied and Computational Mathematics.

Knut Sølna is a Professor in the Department of Mathematics at the University of California, Irvine. He received his undergraduate and Master's degrees from the Norwegian University of Science and Technology and his doctorate from Stanford University. He was an instructor at the Department of Mathematics, University of Utah before moving to Irvine.