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© 2001

The Statistical Mechanics of Financial Markets

  • Econophysics is a really hot topic and allows already some stunning applications in economic modeling

Book

Part of the Texts and Monographs in Physics book series (TMP)

Table of contents

  1. Front Matter
    Pages I-XII
  2. Johannes Voit
    Pages 1-10
  3. Johannes Voit
    Pages 11-22
  4. Johannes Voit
    Pages 23-46
  5. Johannes Voit
    Pages 79-123
  6. Johannes Voit
    Pages 125-138
  7. Johannes Voit
    Pages 159-184
  8. Johannes Voit
    Pages 185-212
  9. Back Matter
    Pages 213-220

About this book

Introduction

From the reviews -
"Provides an excellent introduction for physicists interested in the statistical properties of financial markets. Appropriately early in the book the basic financial terms such as shorts, limit orders, puts, calls, and other terms are clearly defined. Examples, often with graphs, augment the reader’s understanding of what may be a plethora of new terms and ideas… [This is] an excellent starting point for the physicist interested in the subject. Some of the book’s strongest features are its careful definitions, it detailed examples, and the connection it establishes to physical systems."
PHYSICS TODAY, August 2002

"This book is excellent at illustrating the similarities of financial markets with other non-equilibrium physical systems. [...] In summary, a very good book that offers more than just qualitative comparisons of physics and finance." (www.quantnotes.com)

This textbook describes parallels between statistical physics and finance - both those established in the 100-year-long interaction between these disciplines, as well as new research results on capital markets.

The random walk, well known in physics, is also the basic model in finance, upon which are built, for example, the Black-Scholes theory of option pricing and hedging, or methods of risk control using diversification. Here the underlying assumptions are discussed using empirical financial data and analogies to physical models such as fluid flows, turbulence, or superdiffusion. On this basis, new theories of derivative pricing and risk control can be formulated. Computer simulations of interacting agent models of financial markets provide insights into the origins of asset price fluctuations. Stock exchange crashes can be modelled in ways analogous to phase transitions and earthquakes. These models allow for predictions.

This study edition has been updated with a presentation of several new and significant developments, e.g. the dynamics of volatility smiles and implied volatility surfaces, path integral approaches to option pricing, a new and accurate simulation scheme for options, multifractals, the application of nonextensive statistical mechanics to financial markets, and the minority game.

Keywords

Capital Markets Financial Data Random Walks Turbulence agents statistical physics

Authors and affiliations

  1. 1.Theoretische Physik 1Universität BayreuthBayreuthGermany

Bibliographic information

Industry Sectors
Finance, Business & Banking

Reviews

"Apart from its envisioned audience in the physics community this book should be useful to econometricians and statisticians who are interested in an unconventional look at empirical finance. It is excellent at illustrating the similarities of financial markets with non-equilibrium physical systems, notably turbulence. Although it is too early for a final verdict on the merits of ‘physics methods’ in finance, this book is a most welcome starting point for anybody interested in this new interdisciplinary area." (Statistical Papers, 44/2, 2003)

"Provides an excellent introduction for physicists interested in the statistical properties of financial markets. Appropriately early in the book, the basic financial terms such as shorts, limit orders, puts, calls, and other terms are clearly defined. Examples, often with graphs, augment the reader's understanding of what may be a plethora of new terms and ideas. [...] In conclusion, The Statistical Mechanics of Financial Markets is an excellent starting point for the physicist interested in the subject. Some of the book’s strongest features are its careful definitions, its detailed examples, and the connections it establishes to physical systems. The mathematics are the level of upper undergraduate statistics and statistical physics, making the book suitable for students as well as practicing physicists." (Physics Today, 2002)

"This book is excellent at illustrating the similarities of financial markets with other non-equilibrium physical systems. [...] In summary, a very good book that offers more than just qualitative comparisons of physics and finance." (www.quantnotes.com)


"Reading this book is a good way for physicists and those who like training to become acquainted with research problems in finance, and it gives finance people with more conventional backgrounds the chance to see what has been accomplished by the physicists who have worked in this area.” (MATHEMATICAL REVIEWS)

"…an excellent starting point for the physicist interested in the subject…Some of the books strongest features are its careful definition, its detailed examples, and the connections it establishes to physical systems…The mathematics are at the level of upper undergraduate statistics and statistical physics, making the book suitable for students as well as practicing physicists.” (PHYSICS TODAY)