Customer Reviews

Inside Volatility Arbitrage : The Secrets of Skewness

5 star:		(5)
4 star:		(0)
3 star:		(2)
2 star:		(0)
1 star:		(1)

 

 

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.

Now in addition to the data sufficiency issues, I won't say the trades he describes are *bad* arbitrage trades, since they aren't even arbitrage trades *at all*. An inconsistency between two markets is only an arbitrage if the parameters in question are tradable in both markets. The trades aren't even well fleshed out - not surprising, given the brevity of this section.

Finally, on page 219 in the "Word of Caution" section, he throws in the comment that "the skewness transaction described in this chapter is more similar to selling insurance than to an arbitrage." Oh. Gee. Might have told your editors that before they named the book.

Quick note on skew trading: if you had been in the skewness trade described in Chapter 3, I'm fairly certain you would have gotten wiped out in late 2008. There are other ideas out there of safer ways to extract some rents from the skewness discrepancy Javaheri observes. These trades are also long kurtosis to mitigate crash risk, though they still bear volatility term structure risk, and deserve a much more robust analysis than Javaheri gives to his strategies. Search around on the Wilmott forums if you are curious.

Summary:
Chapter 2 on the Inference Problem and model fitting has lots of good material, and the review in Chapter 1 of volatility models covers all the bases, while being overly dense and terse unless you are already basically familiar with most of the models described. Chapter 3 should be read as an observation of potential discrepancies in the market, with a sketch of some very basic options trading ideas, nothing more. Wiley Finance editors should be sacked for the title of this book.

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.

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.

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

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.

This book is an excellent overview of all the work that has been done in the field of stochastic vol. There is no area of research that is not touched upon in the book. The mathematics is very dense and it requires a lot of digging through to get to the point. I would highly recommend the book as a reference book for stochastic vol.

Finally a book explaining all the details and techniques of estimation and volatility arbitrage !
I had been waiting for something like this for a long time.

Best investment I have made in years ! The book is clear, detailed and complete. I recommend it to anyone interested in volatilty models.