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Martingale Methods in Financial Modelling (Stochastic Modelling and Applied Probability) [Hardcover]

Marek Musiela (Author), Marek Rutkowski (Author)
4.8 out of 5 stars  See all reviews (8 customer reviews)
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Editorial Reviews

Review

From the reviews:

" …This book is an impressive work of scholarship in mathematical finance in the area of option pricing. …contains the latest results and references. …The presence of many explicit formulae, for various types of derivatives, will make this book attractive to practitioners; and its breadth of content will make it useful for anyone who considers research in mathematical finance." (The Australian and New Zealand Journal of Statistics)

" …On the whole, this book presents a very wide range of topics and will appeal to both practitioners and mathematicians. …the second part gives an excellent overview of the state of the art in term structure research and will set a clear standard for some time to come." (MathSciNet)

" ...The book contains a wealth of material expressed in a clear mathematical way. A definite bonus is the very extensive list of references which gives the reader a most welcome basis from which to explore further the realm of mathematical finance. …The book can be used ideally both as an introductory and as an advanced text on mathematical finance." (Short Book Reviews)

" …This book is a comprehensive and up-to-date presentation of the martingale approach for pricing and hedging derivative securities. …provides a wide range of topics and will appeal to both practitioners and mathematicians. When only special cases or models are provided, the authors give useful references that will help researchers to obtain even more insight in the topics." (ZentralblattMATH)

From the reviews of the second edition:

"The book starts at an elementary level of mathematics as well as of market and product knowledge. … In summary, the book gives a very broad insight into advanced modern financial mathematics, in particular fixed income models. … It will serve as a basic source of knowledge of the described topics in financial mathematics." (Ludger Overbeck, Mathematical Reviews, Issue 2005 m)

Product Description

In the 2nd edition some sections of Part I are omitted for better readability, and a brand new chapter is devoted to volatility risk. As a consequence, hedging of plain-vanilla options and valuation of exotic options are no longer limited to the Black-Scholes framework with constant volatility. The theme of stochastic volatility reappears systematically in Part II, that has been revised fundamentally, presenting much more detailed analyses of interest-rate models: the authors' perspective throughout is that the choice of a model should be based on the reality of how a particular sector of the financial market functions, never neglecting to examine liquid primary and derivative assets and identifying the sources of trading risk associated. This long-awaited new edition of an outstandingly successful, well-established book, concentrating on the most pertinent and widely accepted modelling approaches, provides the reader with a text focused on practical rather than theoretical aspects of financial modelling.

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Product Details

  • Hardcover: 636 pages
  • Publisher: Springer; 2nd edition (November 25, 2004)
  • Language: English
  • ISBN-10: 3540209662
  • ISBN-13: 978-3540209669
  • Product Dimensions: 9.5 x 6.4 x 1.6 inches
  • Shipping Weight: 2.3 pounds (View shipping rates and policies)
  • Average Customer Review: 4.8 out of 5 stars  See all reviews (8 customer reviews)
  • Amazon Bestsellers Rank: #831,888 in Books (See Top 100 in Books)

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Marek Musiela
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Front Cover | Table of Contents | First Pages | Index | Back Cover | Surprise Me!
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forward swap measure, currency option valuation formula, ith foreign currency, quanto caplet, spot trading strategy, jth caplet, constant strike price, jth swaption, domestic martingale measure, spot martingale measure, forward martingale measure, forward measure approach, arbitrage price process, forward swaption, domestic savings account, currency trading strategy, forward swap rates, futures trading strategy, implied volatility surface, numeraire asset, strictly positive process, minimal martingale measure, strictly positive martingale, admissible trading strategies, general valuation formula
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Monte Carlo, Assume the Gaussian, Chicago Board of Trade
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Customer Reviews

8 Reviews
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4.8 out of 5 stars (8 customer reviews)
 
 
 
 
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55 of 60 people found the following review helpful:
4.0 out of 5 stars yes, but ..., March 17, 2000
By steve (London) - See all my reviews
This review is from: Martingale Methods in Financial Modelling (Hardcover)
I've been using this book on and off over the last year. At first I was very impressed with the level of detail in the mathematics, especially as it was the only book at the time focussing on risk-neutral methods and covering BGM. But I've become increasing disillusioned with it of late. It's difficult to explain, but although the whole book is written in traditional theorem-proof style, there are no real proofs! (I have a PhD in math and have done research for 10 years so I should know a little about proofs.) The only "proofs" provided are basically symbol shifting, but the heart of the math is strangely absent. This is especially strange given the Springer series in which it appears.

In short, if you want a catalogue of methods this book does the job, but if you want a deeper understanding try Lars Nielsens book.

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15 of 15 people found the following review helpful:
5.0 out of 5 stars At the Forefront of Modern Mathematical Finance, May 22, 2005
By Paul Thurston (New York, NY USA) - See all my reviews
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This review is from: Martingale Methods in Financial Modelling (Stochastic Modelling and Applied Probability) (Hardcover)
This advanced text provides an excellent account of the current state-of-the art of options pricing/hedging models and interest rate term structure models. The book is accessible to both advanced practitioners of mathematical finance as well as to pure researchers in the field.

The book is in written in a mathematical style and contains rigorous proofs of many results. However, the main focus of the text is to describe the frontier of knowledge in the subject. Each section contains copious references to the literature and is so current that several references are to working papers. Many sections detail open problems and other areas suitable for scholarly research.

In their second edition, the authors provide an extremely useful critique of each modeling paradigm that they investigate. They also provide evidence for their position in the form of literature references which instruct the reader as to the shortcomings/limitations of a particular model. This information should prove quite valuable to model practitioners and implementers.

The authors assume an advanced background from the field of stochastic analysis, although they do provide an appendix which summarizes key results needed from the field. For the stochastic calculus prerequisites, I recommend Rogers & Williams Diffusions, Markov Processes, and Martingales: Volume 1, Foundations and Diffusions, Markov Processes and Martingales: Volume 2, Itô Calculus. Suitable prerequisites are also covered by Karatzas and Shreve in Brownian Motion and Stochastic Calculus. A good foundation in arbitrage pricing theory is also needed. I recommend the nice treatment by Bjork in Arbitrage Theory in Continuous Time.

The book is divided into two parts. The first part deals with options pricing in equity markets. Chapter 1 sets premlinaries required for the arbitrage theoretic framework, while Chapter 2 has a very nice treatment of discrete time models and finite financial markets.

In Chapter 3, the authors develop the Black-Scholes model along with the Bachelier model using arbitrage techniques. The models are compared and used as benchmark continuous time models and form the basis for all subsequent analysis.

Chapter 4 provides a nice survey of techniques used to price/hedge options in foreign equity and currency markets. The authors assume familarity of the basic workings of foriegn markets.

Chapter 5 is a terrific chapter on valuing American-style options. The American call option is thoroughly studied and approximation techniques for the American put option are introduced. The explicit derivations of the formulas are referenced to the literature.

Chapter 6 provides an introduction to exotic options, although the authors vary their use of the term 'exotic' to meaning 'not a standard European-style or American-style' in this chapter to meaning 'no readily available liquid market' in Chapter 7. The descriptions are quite accessible and the basic properties of the options are described along with pricing formulas (assuming the Black-Scholes framework).

Chapter 7 provides as complete an accounting as I have ever seen of the generalizations of the Black-Scholes model and motivates this from the point of view of volatility surfaces. Many of the well-known models are studied in detail, such as CEV, local volatility, and mixture models. The strengths and weaknesses of each model are analyzed. The stochastic volatility models of Wiggins (via Orenstien-Uhlenbeck processes), Hull-White, and Heston are studied, as is the SABR model. The chapter wraps up with a study of the SIV models, describes how the stochastic volatility models can be obtained via limits of GARCH models and surveys Jump-diffusion processes and Levy processes.

The second part of the book is concerned with term structure models and interest rate derivatives. The authors are quite well-know for their many contributions to this study and their treatment is authoritative.
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7 of 9 people found the following review helpful:
4.0 out of 5 stars Martingales & Finance, April 11, 2003
This review is from: Martingale Methods in Financial Modelling (Hardcover)
I have used this book for two courses in my MSc degree in Financial Maths...well this book is hard to understand at first glance, but, once you are introduced with a good course on stochastic analysis and applied probability, this is an illuminating book...I particularly enjoyed the part on foreing equity derivatives and exotic derivatives.....Harmed with patience this is definitely the book by which you can effectively gain a sound a knowledge on modern mathematical finance theory....reading in conjunction with Bingham-Kiesel book, could help understanding the foundation of the subject.
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Most Recent Customer Reviews

5.0 out of 5 stars Good condition! Perfect shipping time!
It was good condition same as described and good cost.
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Published 18 months ago by Hee Seo

5.0 out of 5 stars Excellent introductory book to financial math
This book takes you through the math of finance step-by-step, passing through very simple examples first and then slowly adding complexity to the models studied. Read more
Published on November 3, 2006 by New York Guy

5.0 out of 5 stars excellent book for post-John-Hull readers
This book covers essentially everything needed for a serious financial math study. It captures the spirit of modern financial math. Read more
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5.0 out of 5 stars A must read for financial engineers.
This book is an essential encyclopedia for modern day derivatives quantitative analysts. The more one reads it the more one treasures it. Read more
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5.0 out of 5 stars The best introduction to martingale method for asset pricing
This is an excellent introduction to martingale method for asset pricing. The authors spell out most of the technical details and make it accessible for most technical inclined... Read more
Published on November 3, 1998 by danielng@unixg.ubc.ca

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