Theory of Financial Risk and Derivative Pricing (eBook)

Risk control and derivative pricing have become of major concern to financial institutions. The need for adequate statistical tools to measure and anticipate the amplitude of the potential moves of financial markets is clearly expressed, in particular for derivative markets. Classical theories, however, are based on simplified assumptions and lead to a systematic (and sometimes dramatic) underestimation of real risks. Theory of Financial Risk and Derivative Pricing summarises recent theoretical developments, some of which were inspired by statistical physics. Starting from the detailed analysis of market data, one can take into account more faithfully the real behaviour of financial markets (in particular the 'rare events') for asset allocation, derivative pricing and hedging, and risk control.

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Risk control and derivative pricing have become of major concern to financial institutions, and there is a real need for adequate statistical tools to measure and anticipate the amplitude of the potential moves of the financial markets. Summarising theoretical developments in the field, this 2003 second edition has been substantially expanded. Additional chapters now cover stochastic processes, Monte-Carlo methods, Black-Scholes theory, the theory of the yield curve, and Minority Game. There are discussions on aspects of data analysis, financial products, non-linear correlations, and herding, feedback and agent based models. This book has become a classic reference for graduate students and researchers working in econophysics and mathematical finance, and for quantitative analysts working on risk management, derivative pricing and quantitative trading strategies.