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The Volatility Surface: A Practitioner's Guide Hardcover – August 28, 2006

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Editorial Reviews


“…I do recommend this book…” (Zentralblatt MATH , Vol. 1118 2007/20)

From the Inside Flap

Understanding the volatility surface is a key objective for both practitioners and academics in the field of finance. Implied volatilities evolve randomly and so models of the volatility surface—which is formed from implied volatilities of all strikes and expirations—need to explicitly reflect this randomness in order to accurately price, trade, and manage the risk of derivative products.

Author and financial professional Jim Gatheral is intimately familiar with these issues and, in The Volatility Surface, he shares his many years of knowledge and experience to help make sense of it all. Written by a practitionerfor practitioners, The Volatility Surface examines why options are priced as they are and—starting from a powerful representation of implied volatility in terms of a weighted average ofrealized volatilities—explores the implications of various popular models for pricing.

The first half of this book focuses on setting up the theoretical framework, while the later chapters are oriented towards practical applications. Informative and accessible, The Volatility Surface:

  • Contains a detailed derivation of the Heston model and explanations of many other popular models such as SVJ, SVJJ, SABR, and CreditGrades
  • Discusses the characteristics of various types of exotic options from the humble barrier option to the super exotic Napoleon
  • Exhaustively covers volatility derivatives with elegant and robust presentations of the latest research
  • Examines performance of exotic cliquet contracts through in-depth case studies of actual bonds that have already matured

The purpose of The Volatility Surface is not to just present results, but to provide you with ways of thinking about and solving practical problems that should have many other areas of application. So by the time you finish reading this guide, you'll have a firm understanding of volatility surface modeling as well as a better idea of how you can apply the results of these models to real-world situations.

Filled with in-depth insights, expert advice, and real-world examples, The Volatility Surface will get you up to speed on the latest theories underlying options pricing as well as familiarize you with the history and practice of trading in the equity derivatives markets.


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Product Details

  • Hardcover: 208 pages
  • Publisher: Wiley; 1 edition (August 28, 2006)
  • Language: English
  • ISBN-10: 0471792519
  • ISBN-13: 978-0471792512
  • Product Dimensions: 6.3 x 0.8 x 9.3 inches
  • Shipping Weight: 14.1 ounces (View shipping rates and policies)
  • Average Customer Review: 4.1 out of 5 stars  See all reviews (15 customer reviews)
  • Amazon Best Sellers Rank: #405,408 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

52 of 54 people found the following review helpful By Neil A. Chriss on October 26, 2006
Format: Hardcover
The Volatility Surface is an-ultra modern account of derivatives pricing and hedging. Indeed of the fifty-two bibliographical references a mere twenty were written before 1999. The book makes the case for option pricing models which incorporate randomness into stock price volatility (stochastic volatility) and jumps into stock price movements. By themselves these are not new models, but a coherent understanding of their relationship to the dynamics of the volatility surface and to derivatives valuation is new, and Gatheral does an admirable job of presenting a great deal of the most modern work in this area - including some of his own - in one place.

The topic is necessarily mathematical in nature and Gatheral spares the reader nothing of the full-on mathematical treatment; but he nevertheless manages to distill the essence of the most important mathematics into easily accessible, intuitive explanations that supplement the readers understanding. Thus this book should have broad appeal to practitioners of all levels, especially traders and those familiar with the basics of derivatives valuation. Gatheral succeeds in this vein so well, I believe, because he is a first-rate quant and a a long-time senior quant at Merril Lynch.

The book gives an excellent treatment of the relationship between stock price dynamics which actually explain option prices observed in the market and the necessity of studying the volatility surface to have a complete understanding of derivatives valuation. He does a great job of justifying the key models he reviews and then studies the implications for derivatives valuation.

As an expert practitioner, his choices reflect what is really out there in the market, so readers should pay attention.
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35 of 36 people found the following review helpful By Euan Sinclair on September 19, 2006
Format: Hardcover
The academic literature on stochastic volatility models is vast and often difficult to understand or at least to gain a coherent view of the field from. This book provides a succinct introduction. It is well written without over simplifying issues.

Things are looked at from the view of a practitioner rather than an academic. Proofs are generally not formal and are designed to stress financial insight over rigour. But it is important to state that "practitioner" means quant rather than trader, and that this is not a piece of light reading!

I was pleased to see sections on asymptotic solutions, volatility derivatives and an introduction to credit but was a little disappointed by the brevity of the bibliography.

A good book to have around.
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11 of 14 people found the following review helpful By M on November 12, 2006
Format: Hardcover
The book is a great guide to understanding the different models used on Wall Street to capture the intricacies of modeling and pricing derivatives. The books focus of using models as a tool and NOT a solution is a great reminder to both traders and salespeople.

This summarized when the author describes the pricing of a digital cliquet.

"Those sellers using local Vol models will certainly value a digital cliquet at a lower price than sellers using stochastic volatility. Perversely then, those sellers using an inadequate model will almost certainly win the deal and end up short a portfolio of misvalued forward-starting digital options. OR even worse, a dealer could have an appropriate valuation approach but be pushed internally by the salespeople to match (mistaken) competitors' lower prices."
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6 of 8 people found the following review helpful By Gourion on August 28, 2009
Format: Hardcover
A good book for its wide view of all the topics linked to the volatility trading : stochastic volatility and jumps with a quite rare study of the impact of stochastic vol over the pricing of most commons exotic products like cliquets, lookback etc... The main problem of this book are :
1/ the incredible numbers of errors and typos in the proofs (typos for the two first chapters has been published by the author on the website of the Imperial College where Mr Gatheral has given lessons)
2/ the fact it's not so useful as the link between dividends and vol stochastic isn't treated at all.
3/ Most of the interesting theoretical exposee are clearly uncomplete and needs further investigation. But as the author try to do a wide tour of the subject in a rather limited number of pages, this is not surprising.
4/ This isn't explicit but this is of a weaker interest for stochastic volatility of underlyings other than Equities, index and funds...

So finally, it's a good tour on the subject but for a lot of subjects it look likes a summary. Others books are needed. mainly the Alan Lewis book for Fourier transform's methods of pricing, the Cont/tankov on the Jumps process (see my review of this one) and the Alireza Javaheri's one for a more deeper work on THE calibration problem of stochastic volatility.
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2 of 2 people found the following review helpful By Huseyin Erturk on December 23, 2014
Format: Hardcover Verified Purchase
This book contains a lot of errors. Even after reviewing errata, I have still found errors in taking differentials which made me loose a lot of time trying to figure out the correct formulation. I literally had to drive the formula on myself. I checked with the original papers sometimes. I wish writers pay more attention to what they write when they publish a book.
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11 of 16 people found the following review helpful By Bachelier on February 6, 2007
Format: Hardcover
Jim Gatheral has done everyone in quant fin a service by gathering and organizing his lectures, practical execution issues, and experience in this welcome volume, The Volatility Surface: A Practitioner's Guide. This is simply an excellent, clear work that defies the logic that good valuable books in finance don't get written because authors make more money elsewhere. Compare Gatheral with the execrable collection of disjointed papers with Jarrow's name slapped on it (Volatility, Jarrow, et al,1998). This is the book they were trying to write, but it took a practitioner who had his hands dirty and worked hard to try to explain what he was doing to write it.

Topics are rolled out extremely well, and Gatheral dives right in to where practitioners swim: volatility isn't a single data point, or a smile, but a surface and needs to be thought of that way. In explicating the volatility surface and the possible explanations for shapes Gatheral raises the level of conversation for everyone in the field: this is the way we must think of volatility now (until something better comes along, but given the curse of dimensionality my guess is we will be here for a very long time).

This is an excellent, necessary book. Full disclosure: I am not an expert in this field and only have friends who are (many of them are editorial and AMAZON reader reviewers cited here). This book assists me in having interesting and comprehensible conversations with them, but if there are any flaws they likely would escape me. So far, my friends who are experts all agree: thank you Jim Gatheral, excellent job. Very helpful and well worth the money.
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