The Statistical Mechanics of Financial Markets (Texts and Monographs in Physics)

From the reviews of the first edition - "__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, its detailed examples, and the connection it establishes to physical systems__." PHYSICS TODAY "__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__." (www.quantnotes.com) This highly-praised introductory treatment 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 new 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. From The Reviews Of The First Edition - 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, Its Detailed Examples, And The Connection It Establishes To Physical Systems. Physics Today 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. (www.quantnotes.com) This Highly-praised Introductory Treatment 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 New 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. From The Contents: Introduction -- Basic Information On Capital Markets -- Random Walks In Finance And Physics -- The Black--scholes Theory Of Option Prices -- Scaling In Financial Data And In Physics -- Turbulence And Foreign Exchange Markets -- Risk Control And Derivative Pricing In Non-gaussian Markets -- Microscopic Market Models -- Theory Of Stock Exchange Crashes -- Appendix: Information Sources -- Notes And References -- Index. Johannes Voit. Includes Bibliographical References (p. [271]-284) And Index. 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." (www.quantnotes.com) 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 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. Moreover, the book was scanned for and corrected from errors, both typographical and in presentation. 'Provides an excellent introduction for physicists interested in the statistical properties of financial markets... basic financial terms such as shorts, limit orders, puts, calls, and other terms are clearly defined... an excellent starting point for the interested physicist.'PHYSICS TODAYThis introductory treatment describes parallels between statistical physics and finance, both long established and new research results on capital markets. Forming the core of Voit's treatment are the concepts of random walks, scaling of data, and risk control. Voit discusses the underlying assumptions using empirical financial data and analogies to physical models such as fluid flows and turbulence. He formulates theories of derivative pricing and risk control, and shows how computer simulations of markets provide insights into price fluctuations and how crashes are modelled in ways analogous to phase transitions. This corrected edition has been updated with several new and significant developments, e.g. the dynamics of volatility smiles and implied volatility surfaces, path integral approaches to option pricing, a new simulation scheme for options, multifractals, the application of nonextensive statistical mechanics to financial markets, and the minority game. Front Matter....Pages I-XIV Introduction....Pages 1-11 Basic Information on Capital Markets....Pages 13-24 Random Walks in Finance and Physics....Pages 25-48 The Black—Scholes Theory of Option Prices....Pages 49-84 Scaling in Financial Data and in Physics....Pages 85-152 Turbulence and Foreign Exchange Markets....Pages 153-176 Risk Control and Derivative Pricing in Non-Gaussian Markets....Pages 177-207 Microscopic Market Models....Pages 209-245 Theory of Stock Exchange Crashes....Pages 247-270 Back Matter....Pages 271-290 "This new 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."--BOOK JACKET This volume provides an introduction for physicists interested in the statistical properties of financial markets. This new study edition has been updated with a 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 and more.