Customer Reviews

Interest Rate Modelling: Financial Engineering

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

 

 

While very ambitious and containing some very good material, I think there are too many errors, typos, and gaps in this book. For example, the derivation of equation (3.20) on page 43, a not insignificant result on swap rates, is embarrasingly wrong. They make 2 fundamental errors in equations (3.15) and (3.16) and appear fortunate to arrive at (3.20) which is correct. These errors are not mere typos. Their examples related to the concept of a filtration on top of page 58 appear to be wrong. Elsewhere in the book notation is often used inconsistently and without adequate definition. There are also gaps. For example, when discussing volatility structures in Section 16.1, they use equation (16.6) (which is correct) in a number of examples, but I could not find where they actually derived that equation. (It should have been in the HJM chapter) but was not there.

I like the fact that they wanted to include a chapter on term structures from the macro-economic perspective. Unfortunately this chapter is difficult to read, provides no macroeconomic intuition and again appears to omit too many details. For example, the description of the IS-LM-Phillips model is inadequate and either should be expanded or dropped from future editions. Likewise, the description of the Sommer model is inadequate. Equation (11.3) in the statement of Sommer's Theorem would appears to be wrong at first sight. The left-hand-side of that equation is known by time t, but the right-hand-side would appear to be UNknown by time t. This apparnet contradiction can be explained but the authors never comment on such matters, often making the material more difficult to follow.

Chapter 17 on GMM and MLE methods is quite nice but again, not everything is adequately explained. The examples of Section 17.2.5, for example, seem to assume that certain variables are observable in the market place (e.g. volatility, v_t in equation 17.38) but this seems inapproriate as v_t would generally be unobservable. Indeed this is stated in Chapter 18. Again, however, James and Webber provide no clarification whatsoever of this issue, leaving the reader to wonder what exactly was done.

Some sections are also poorly motivated. For example, Section 16.4, "Processes on Manifolds", in the chapter on Principal Components Analysis is not motivated properly. While the material is quite straightforward to read (though they should define terms like diffeomorphism if they want to use them in a financial engineering text), it is not clear why you need to bring in the language of manifolds and tangency spaces etc. After all, where is this material used in the example of Section 16.4.5? It seems to me that the examples of Section 16.4 are interesting and do lead to new types of term structure models, but that this material could be presented without the jargon of manifolds. Again, I may be wrong but then I would blame the authors for not writing clearly.

A final criticism is that it seems on occasion that the authors are writing about material that they are not particularly familiar with, all for the sake of being encyclopedic. This thought crossed my mind when reading the chapter on Monte Carlo simulation. For example, with reference to equations (13.11)-(13.13) it would have taken very little to point out that Jensen's Inequality implies that some estimated security prices will be biased. Indeed the authors hint at this in the final paragraph on page 350 but do not make the point.

There are many other examples of these errors / typos / gaps in the book. And as far as I know there is no list of errata available.

I will not mention the many good things in this book as other reviewers have already done so. However, I think their praise has been excessive and feel that 3 stars is appropriate.

James and Webber summarize the field quite well. I'd say that if you've read Wilmott and want to go to the next level for rates modelling this is the perfect book.

They cover continuous-time techniques and the fin math theory nicely; it's sufficiently in-depth to give the non-specialist a feel for things like the Girsanov theorem and how to start coming up with ANALYTIC solutions to some of the PDE's floating around.

I was also delighted to read their treatment of "economic" term structure models. I was not even aware that such a thing existed before reading the book -- not that they are particularly useful, but it is an interesting concept nonetheless.

Direct implementation of multifactor affine models should have been covered in greater depth and been more idiot-proofed. I am NOT a quant but strive greatly to understand the models I use and how they are constructed. Since almost everyone on the planet uses no-arbitrage affine models, it would have been nice to have that topic covered in far greater depth. In fact, very little of the book was devoted to arbitrage-free models to my disappointment.

I found the chapters devoted to numerical implementation to be relatively weak. Wilmott does a much better job. One part of the numerical implementation methodology that I did like QUITE a bit was their discussion of splining techniques. It is absolutely critical to develop a robust, stable spline before attempting anything other than a nonparametric model.

This book is devoted to term structure models; the reader does not get a treatment of related topics suchs as credit quality or mortgage-backed securities. In fact, very little time is given to derivative pricing or hedging, either.

All in all the book is quite good at what it claims to be, but don't buy it thinking it is a general introduction to all the fun stuff out there.

I have spent a number of years in building & implementing models for interest-rate-dependent claims, but should admit: I learned more from this book. I view it as an encyclopedia on the subject, in which the authors (never heard their names before - what a shame!) have done an excellent job on reviewing hundreds of publications. The theory of term structure modeling has been grown to a separate subject - thanks to Hull and White, Jamshidian, HJM, BGM, Hughston - among main contributors. You can find all methods in one place and in a very accesible form. For example, HJM is described better and simpler than in the author's original paper. Most models are reviewed with practical implementation in mind.

It is not a "first book" on "introduction" on the subject; it is rather a good desk reference for prepared professionals.

There are plenty of books on fixed income mathematics. This one is extraordinary. It is simultaneously practical, theoretically sophisticated and a pleasure to read. The treatment of term-structure models, including HJM, is the most accessible I have seen anywhere. There is a lot of information on yield curve building. This includes both bootstrapping and more recent research in parameterised curves. There are plenty of topics that other books might label "beyond the scope of ...", but James and Webber jump right in, with meaty discussions of the Kalman filter, lattice methods of valuation and GARCH models. Despite all the theory, the authors are always in touch with practical details. They take into account stub dates, and are precise about day counts. These are obviously practitioners!

This complete work is an excellent source of practical term structure modelling. The author's ability to merge academic rigor with the practical application of valuation and hedging with term structure models makes this book supremely readable. Both quant traders and systems vendors will find this an invaluable addition to any refernce library and despite some fairly high-level math an excellent treatise from introduction to detail. In partnership with Rebonato's book Interest Rate Option Models and Clewlow-Strickland's Implementing Derivatives Models, everything a quant would ever like to know but was afraid to ask...

As a math grad student who is interested in the term structure modelling, I found that this book is really useful! It just tells you everything about interest rate modelling,not just for the no-arbitrage modelling issue, they even have a chapter about the macroeconomic foundation for interest rate fluctuation! The math used in this book is very concise without too much measure theory twaddle,Everyone who works in this field should have a copy. It's a real must!

List different way of yield curve fitting method, and good explain why B-spline
is good. Also term structure on general manifold is interesting, although a review don't
think it's useful.