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Inside Volatility Arbitrage : The Secrets of Skewness Hardcover – September 14, 2005


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Editorial Reviews

Review

"...ideal for academics and practitioners who want to focus on volatility modeling. . . All of this makes the book rich and valuable. . . Go and get it!" (Wilmott magazine, September 2005)

"Best New Quantitative Finance Book of the Year" (Wilmott Awards 2006)

From the Inside Flap

Financial markets—whether you're dealing with stocks or options—don't always behave according to a normal distribution pattern. Instead, they sometimes exhibit "fat tails," which are defined as prices that are skewed far away from the normal bell curve. If the bulk of returns are pushed to the right, then the distribution has positive skewness. The danger lies in negatively skewed distribution with excess kurtosis, which means there's a high probability of losses much larger than the mean. When dealing with volatility arbitrage, you must take these issues into account in order to manage risk and capture profits.

With Inside Volatility Arbitrage: The Secrets of Skewness, Alireza Javaheri provides one of the most comprehensive looks at this important topic. Divided into three informative sections, this guide focuses on developing methodologies for estimating stochastic volatility (SV) parameters from the stock-price time-series under a classical framework.

In Section 1: The Volatility Problem, Javaheri introduces the concept of various parametric SV models and examines literature on the subject of non-deterministic volatility. Here, you'll receive in-depth information on the relationship between volatility and the stock and derivatives markets, detailed insights on Brownian motion for stock price returns, and option pricing techniques such as inversion of the Fourier transform and mixing Monte Carlo. You'll also gain invaluable knowledge on a variety of models, from local volatility and stochastic volatility models to pure-jump models.

In Section 2: The Inference Problem, Javaheri tackles the notion of inference (or parameter estimation) for parametric SV models—briefly analyzing cross-sectional inference and then focusing on time-series inference. Here you'll discover how to estimate model parameters using two possible sets of data: options prices and historic stock prices.

Finally, in Section 3: The Consistency Problem, Javaheri shows you how to apply parametric inference methodologies to a few assets. He also reveals why you should question the consistency of information contained in the options markets and the stock market.

Filled with in-depth insights, proven models, and illustrative charts, Inside Volatility Arbitrage will help you realize when "skewness" may present valuable trading opportunities, as well as why it can be so profitable.

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Product Details

  • Hardcover: 272 pages
  • Publisher: Wiley; 1 edition (September 14, 2005)
  • Language: English
  • ISBN-10: 0471733873
  • ISBN-13: 978-0471733874
  • Product Dimensions: 6.4 x 1 x 9.4 inches
  • Shipping Weight: 1.2 pounds (View shipping rates and policies)
  • Average Customer Review: 3.8 out of 5 stars  See all reviews (9 customer reviews)
  • Amazon Best Sellers Rank: #1,466,643 in Books (See Top 100 in Books)

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Customer Reviews

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Most Helpful Customer Reviews

27 of 27 people found the following review helpful By Amazon Customer on May 12, 2009
Format: Hardcover
The Good: Very good review of stochastic volatility models, Heston, SVJ, etc. I say review because if you've never seen SV models before, this is most definitely not the best place to learn about them for the first time. I would instead recommend online sources (Nimalin Moodley's paper is a great introduction to the Heston Model), the Gatheral lectures at NYU and the corresponding book "The Volatility Surface" by Jim Gatheral - in fact, I recommend working through the problems from his course notes while working through the book, it will improve your experience dramatically. What Javaheri does better than Gatheral is dive into the nitty gritty of applied model calibration for stochastic volatility models, i.e. the content of Chapter 2.

The Bad: The title stinks. This book is not a sneak peek into volatility arbitrage strategies. There is a very small amount of content related to practical trading strategies, and none (zero) related to options arbitrage. Don't look here for useful trading strategies, don't expect this to show you how to run an options trading desk.

The Ugly: Chapter 3. This is just not pretty. I'm not a domain expert - I am a physicist and computer scientist with an MBA, and I am still learning when it comes to financial engineering. But I know enough finance and math to shake my head when I read this chapter. This guy looks at a few year's worth of data at a time and concludes that the options market is over-estimating skew relative to historical time series.

Umm, data sufficiency issues here? He then acknowledges this on pages 197/198 on the Peso Theory before going on to vaguely describe a few trades, i.e. going short skew or long kurtosis.
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19 of 23 people found the following review helpful By S. Fannin on April 8, 2008
Format: Hardcover
DO NOT buy this book based on the title - it has little to do with skew and how to take advantage of it. Do buy it if you want a review of mathematical volatility models.
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62 of 82 people found the following review helpful By SR on September 17, 2005
Format: Hardcover Verified Purchase
I've ordered dozens of books from Amazon over the years and this is the 1st one I'm returning. The title is nonsense -- it should read Stochastic Volatility Models for Phds.
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4 of 5 people found the following review helpful By Raúl Muñoz Reyes on February 8, 2008
Format: Hardcover
Sometimes practitioners think what the smile is "given by the heaven" and what all the traders are "prices takers"...but..¿what if there are not available option prices? or ¿what happens if the option market prices are not taking in account the real underliying evolution or the real hedging costs implied in this evolution?.
This books explain how you can model the smile when only the statistical serie of the underliying is available, and finally check the consistency between the implied parameters in the option prices and the parameters implied in the time series for a speciffical model, and check if there exist an arbitrage opportunity (or a badly specified model). Is important to say what additionally Javaheri provides a very flexible code for implementating and testing diferent econometric approaches to solve the problem.

The only suggestion to the author for the next edition is to dedicate more pages to one of the most complex underlying's: the yield curve, because is well known that this subject requires special attention.

Finally is necessary to give a warning...this book demands from a reader a high level in maths and econometric time series, in other way the readers could have a "depress", like i could see in other review.
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6 of 8 people found the following review helpful By Aleksandar Mojanchevski on November 7, 2007
Format: Hardcover
This is one of those rare books that actually shows you how to find the optimal set of parameters. The only thing missing in this book is the actual procedure for finding the optimal set of parameters. It is mentioned, however, the procedure is the Powells method from "Numerical Recipes in C", but how the initial solution is guessed is not specified.

That is the only thing that has stopped me from naming this book "A Perfect Masterpiece".

And finally, to the person who has written the review "Practitioners Beware", I would say, "on the contrary!". Practitioners, this is it!

Sincerely,
Aleksandar Mojancevski
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