Parallels between physics and finance were established in a 100-year-long interaction of both disciplines. This study examines these parallels as well as research results on capital markets by statistical physics. The random walk, well known in physics, is also the basic model in finance. On this model is built the Black-Scholes theory of option pricing and hedging, or methods of risk control by diversification. 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 of risk control can be formulated. Computer simulations of interacting agent models of financial markets provide insight into the origins of asset price fluctuations. Stock exchange crashes can be modelled in analogy to phase transitions and earthquakes. These models allow for predictions.
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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.Review:
From the reviews:
"Apart from its envisioned audience in the physics community this book should be useful to econometricians and statisticians who are interested in an unconventional look at empirical finance. It is excellent at illustrating the similarities of financial markets with non-equilibrium physical systems, notably turbulence. Although it is too early for a final verdict on the merits of ‘physics methods’ in finance, this book is a most welcome starting point for anybody interested in this new interdisciplinary area." (Statistical Papers, 44/2, 2003)
"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. [...] In conclusion, The Statistical Mechanics of Financial Markets 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 connections it establishes to physical systems. The mathematics are the level of upper undergraduate statistics and statistical physics, making the book suitable for students as well as practicing physicists." (PHYSICS TODAY)
"An interesting book that blends textbook explanation with well-established concepts in finance and physics with a review of more recent ideas [...] On the whole the book is well balanced between the new and the old, truth and hope, lore and lure. It has some significant overlaps with books such as Mantegna and Stanley’s An Introduction to Econophysics and the book I coauthored with Potters, Theory of Financial Risks; however, it is broader in scope and contains a lot more physics and speculative ideas. The useful references and Web links provided at the end of the book might make it an easier step to climb for physicists who want to know where the action is." (Jean-Philippe Bouchaud, AMERICAN SCIENTIST, 90/3, 2002)
"Reading this book is a good way for physicists and those with 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." (Mathematical Reviews 2002a)
"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)
From the reviews of the second edition:
"The purpose of the present book is to express ... connections between econometrics and physics. ... the book covers a broad variety of topics concerning financial market research and its link to physics. ... Many figures as well as the interspersed examples illustrate well the presented facts ... . The appendix ... offers valuable hints regarding opportunities to improve one’s knowledge starting from this book. ... It is a valuable tool for ... interested researchers in the field of financial markets." (Olaf Schoffer, Statistical Papers, Vol. 46 (2), 2005)
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Descripción Secaucus, New Jersey, U.S.A.: Springer Verlag. Soft cover. Estado de conservación: New. Estado de la sobrecubierta: New. 3rd Edition. **INTERNATIONAL EDITION** Read carefully before purchase: This book is the international edition in mint condition with the different ISBN and book cover design, the major content is printed in full English as same as the original North American edition. The book printed in black and white, generally send in twenty-four hours after the order confirmed. All shipments contain tracking numbers. Great professional textbook selling experience and expedite shipping service. Nº de ref. de la librería ABE-8023625360
Descripción Springer-Verlag, 2001. Hardcover. Estado de conservación: New. Never used!. Nº de ref. de la librería P113540414096