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.
Table of 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.
Derivative Pricing Beyond Black-Scholes.
Microscopic Market Models.
Theory of Stock Exchange Crashes.
Risk Management.
Economic and Regulatory Capital for Financial Institutions.
Appendix.
Notes and References.
Index.
378 p. 99 illus., Hardcover