From the reviews - "Provides an excellent introduction for physicists interested in the statistical properties of financial markets. Appropriately early in the book the basic financial terms such as shorts, limit orders, puts, calls, and other terms are clearly defined. Examples, often with graphs, augment the reader's understanding of what may be a plethora of new terms and ideas... [This is] an excellent starting point for the physicist interested in the subject. Some of the book's strongest features are its careful definitions, it detailed examples, and the connection it establishes to physical systems." PHYSICS TODAY, August 2002
"This book is excellent at illustrating the similarities of financial markets with other non-equilibrium physical systems. [...] In summary, a very good book that offers more than just qualitative comparisons of physics and finance.
MATHEMATICAL REVIEWS "Reading this book is a good way for physicists and those who like training to become acquainted with research problems in finance, and it gives finance people with more conventional backgrounds the chance to see what has been accomplished by the physicists who have worked in this area."
PHYSICS TODAY "...an excellent starting point for the physicist interested in the subject...Some of the books strongest features are its careful definition, its detailed examples, and the connections it establishes to physical systems...The mathematics are at the level of upper undergraduate statistics and statistical physics, making the book suitable for students as well as practicing physicists."
This textbook describes 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 capital markets.
The random walk, 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, or methods of risk control using diversification. Here the underlying assumptions are discussed using empirical financial data and analogies to physical models such as fluid flows, turbulence, or superdiffusion. On this basis, new theories of derivative pricing and risk control can be formulated. Computer simulations of interacting agent models of financial markets provide insights into the origins of asset price fluctuations. Stock exchange crashes can be modelled in ways analogous to phase transitions and earthquakes. These models allow for predictions.
This study edition has been updated with a presentation of several new and significant developments, e.g. the dynamics of volatility smiles and implied volatility surfaces, path integral approaches to option pricing, a new and accurate simulation scheme for options, multifractals, the application of nonextensive statistical mechanics to financial markets, and the minority game.
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.
