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4 of 4 people found the following review helpful:
5.0 out of 5 stars
Invaluable Resource for Fixed Income Professionals, October 7, 2009
This review is from: Dynamic Term Structure Modeling: The Fixed Income Valuation Course & CD-ROM (Wiley Finance) (Hardcover)
I have been using this book for the past 2 years and I have found it to be invaluable in pricing, valuation and risk analysis of a large number of fixed income instruments. Accurate valuation is at the core of our business and this is book is now the standard reference for me and my quant team. The depth of analysis and also the quality of editing is superior to most other books on this subject.
This is the first book that gives HJM-type models corresponding to virtually every multifactor affine, Gaussian, and quadratic model. In fact, these extensions are better than the original HJM models, because unlike HJM models, the extensions given here have much analytical tractability, while allowing consistency with the initially observed term structure.
The software allows valuing a variety of interest rate-dependent securities and their derivatives like bonds, interest rate swaps, FRAs, forward contracts, T-bill futures contracts, Eurodollar/Euribor futures contracts, interest rate caps, floors, collars, European payer swaptions, European receiver swaptions, American swaptions, American call options on coupon bonds, American put options on coupon bonds, credit default swaps, etc., using a variety of techniques including analytical formulas, numerical trees, Fourier inversion method, and the cumulant-expansion method. Since authors create Excel user functions using Excel/VBA at the frontend and C, C++ running at the backend, these excel functions can be simply cut and paste anywhere on the spreadsheet.
No other book in fixed income comes even close in providing such user-friendly spreadsheets on such an extensive collection of models. At present, I am personally using the LIBOR market model spreadsheet to create perturbations for the volatility surface implied by swaption prices.
I would like to point out a total misrepresentation by another reviewer "Ganeshaj1 Gns" who claims that "many of the examples were taken from the first book's spreadsheet." The two books together have 17 spreadsheets out of which ONLY one spreadsheet on the "estimation of term structure" is common to both the books. However, this spreadsheet is essential to both books, as both books require that the term structure be estimated using either the Nelson and Siegel method or Cubic-Spline method. Note that 16 of the 17 spreadsheets belong either only to the first book or only to the second book, BUT NOT TO BOTH! Hence, except for a single spreadsheet that is necessary in both books, all other spreadsheets in the two books are totally different. Further, the second book has 28 fully developed examples in various chapters, which though less than the first book, still are plenty to work with.
I believe if readers are looking to understand complex fixed income models, and want the ability to run excel simulations using software etc., then no other books are comparable with the two books by these authors in the fixed income space. Similar to Hull's book, the authors do not provide the software code of their models, however.
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3 of 3 people found the following review helpful:
4.0 out of 5 stars
DTSM formula, July 12, 2009
This review is from: Dynamic Term Structure Modeling: The Fixed Income Valuation Course & CD-ROM (Wiley Finance) (Hardcover)
I came across this book in my library and decided to buy it after browsing it. What I like about it is that it gives all the explicit formula for analytical affine DTSM, such as multifactor Vasicek model, multifactor CIR model, and mixed Vasicek-CIR model, as well as the risk neutral models (+, ++ and +++) models. A lot of detail in close to 700 pages. Very useful as a reference. The book also gives tree implementations of DTSM but personally I have not used them.
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2 of 2 people found the following review helpful:
5.0 out of 5 stars
A must have..., October 22, 2009
This review is from: Dynamic Term Structure Modeling: The Fixed Income Valuation Course & CD-ROM (Wiley Finance) (Hardcover)
Great! You have to buy this book to believe what is in it. This book has the only demonstration of CIR tree that is 100% correct and does not use any ad-hoc tricks as used by other authors like John Hull, Peter Ritchken, and Brigo-Mercurio, who do not allow the short rate to hit the zero boundary. In fact, the book shows using numerical simulations how their tree is better than the original tree by Nelson and Ramaswamy, both in efficiency and accuracy. Since a basic CIR tree is needed for all two factor extensions, and their applications to reduced-form credit models etc., this demonstration with numerical example is really helpful. The book also derives double-plus models (i.e., which fit the shape of the initial yield curve, like HJM models) for every known short rate model from multifactor affine and quadratic to CEV models. So in one shot it gives you a huge variety of HJM type models with analytical solutions and trees. In fact, double-plus short rate models are all that one needs, as they have all the advantages of HJM paradigm, without any limitations of the typical HJM models (e.g., non-Markovian, etc.). Then there are interesting new models, like new jump trees for jump-extended Vasicek and jump-extended CIR. Under the jump-extended CIR, jumps can occur in both directions (positive and negative) and yet short rate is always non-negative. I thought this was impossible, since other authors can only allow positive jumps, or limit the size of negative jumps. The book has analytical solutions for Eurodollar futures, caps, and swaptions for almost every multifactor affine and quadratic model, including HJM type extensions of these models, and under a variety of LIBOR market models. The results on Fourier inversion for pricing caps and cumulant expansion techniques for pricing swaptions are more complex, but explained as well. The book also has analytical closed-form formulas for CDS pricing under a variety of HJM-type multifactor affine and quadratic models. Finally, it also has really good explanations of the different versions of the LIBOR market model, including LSM, LFM, displaced diffusion LIBOR model, stochastic volatility (SV) LIBOR model, and the jump-extended SV LIBOR model. Also, some interesting discussion on how correlations between forward rates don't matter under LIBOR model, but do matter under short rate models for pricing caps. The Excel spreadsheets can price a range of interest rate using analytical solutions, Fourier methods, cumulant expansion methods, and trees. But the book does not give the pseudo code. Also, if you want solutions of interest rate exotics (captions, trigger swaps, etc.) - this book does not provide them. These are covered well in a book by Brigo-Mercurio, which is a great book on interest rate modeling, but more demanding mathematically than this book.
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