Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management (Hardcover)
by Jean-Philippe Bouchaud (Author), Marc Potters (Author)

Hardcover: 400 pages

Publisher: Cambridge University Press; 2 edition (February 2, 2004)

Language: English

Review
"...thought-provoking...The feeling one is left with after putting the book down is one of time well spent."
Risk

"...the authors offer fresh and valuable insights into financial markets." -
Mathematical Reviews

"The book is well written and self-contained...recommended to anyone interested in a new and fresh approach to the dynamics of financial markets."
Journal of Statistical Physics

"The book is interesting not only for physicists working in finance, but also practicioners and scholars with a mathematical or statistical background."
Journal of the American Statistical Association

Book Description
Summarizing market data developments, some inspired by statistical physics, this book explains how to better predict the actual behavior of financial markets with respect to asset allocation, derivative pricing and hedging, and risk control. Risk control and derivative pricing are major concerns to financial institutions. The need for adequate statistical tools to measure and anticipate amplitude of potential moves of financial markets is clearly expressed, in particular for derivative markets. Classical theories, however, are based on assumptions leading to systematic (sometimes dramatic) underestimation of risks.

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Contents
1. Probability theory: basic notions
 2. Maximum and addition of random variables
3. Continuous time limit, Ito calculus and path integrals;
4. Analysis of empirical data
5. Financial products and financial markets
6. Statistics of real prices: basic results
7. Non-linear correlations and volatility fluctuation
8. Skewness and price-volatility correlations
9. Cross-correlations
10. Risk measures
11. Extreme correlations and variety
12. Optimal portfolios
13. Futures and options: fundamental concepts
14. Options: hedging and residual risk
15. Options: the role of drift and correlations
16. Options: the Black and Scholes model
17. Options: some more specific problems
18. Options: minimum variance Monte Carlo
19. The yield curve
20. Simple mechanisms for anomalous price statistics