23 of 24 people found the following review helpful
Excellent introduction to mathematical finance.,
By A Customer
This review is from: Financial Calculus: An Introduction to Derivative Pricing (Hardcover)
I find this book definitely the best textbook available for a student with a quantitative background wishing to understand the basic ideas behind the theory of arbitrage pricing of derivative assets. Includes advanced topics such as HJM models for interest rates but remains understandable throughout the text. The book succeeds in maintaining a nice equilibrium between mathematical formalism and results of practical relevance.
One very important problem though is the TOTAL LACK of empirical examples and comments on the practical relevance of the various models introduced, which is crucial in any applied field. The text does not give any insight into the limits of the models presented and may lead the uninformed reader to jump to dangerous conclusions as to the applicability of some of the models presented.
There is also a certain amount of lack of scientific transparency involved: the reader is shown two similar-looking curves, one representing geometric Brownian motion and one representing the FTSE index as a 'justification' of the lognormal model for stock prices. The inadequacy of the lognormal model for stock prices is a well known fact with important consequences and should be mentioned in a text meant for students and beginners. For example, little is said about the volatility smile, market imperfections and related issues.
In short, this book is a good introduction to "mathematical finance" -considered as a branch of probability theory, probably the best introductory text written to this day. However it remains a book written by mathematicians with little relevance to finance or (real) financial markets.
Nevertheless, I enjoyed reading it!
(6 customer reviews)