The Statistical Mechanics of Financial Markets (Theoretical and Mathematical Physics)

This highly praised introductory treatment describes the 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 financial markets.

The random-walk technique, 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, plus methods of portfolio optimization. Here the underlying assumptions are assessed critically. Using empirical financial data and analogies to physical models such as fluid flows, turbulence, or superdiffusion, the book develops a more accurate description of financial markets based on random walks. With this approach, novel methods for derivative pricing and risk management can be formulated. Computer simulations of interacting-agent models provide insight into the mechanisms underlying unconventional price dynamics. It is shown that stock exchange crashes can be modelled in ways analogous to phase transitions and earthquakes, and sometimes have even been predicted successfully.

This third edition of "The Statistical Mechanics of Financial Markets" especially stands apart from other treatments because it offers new chapters containing a practitioner's treatment of two important current topics in banking: the basic notions and tools of risk management and capital requirements for financial institutions, including an overview of the new Basel II capital framework which may well set the risk management standards in scores of countries for years to come.

Clear historical description of Einstein/Bachelier. Hopefully one day we will call derivatives pricing the Bachelier valuation.

The book in short provides an excellent perspective on the statistical approach to asset price dynamics. Very clear and to the point.

Nassim Nicholas Taleb


Excelllent introduction and very stimulating   February 1, 2006
Gerald Davis (Melbourne, FL United States)
5 out of 7 found this review helpful

This book was my first thorough introduction to this field and I have found it thoroughly enjoyable. The comparisions between the tools of Physics and Finance along with the presentation of empirical data was highly stimulating. The economic terms were presented with lucidity and conciseness and the use of relevant examples in both Physics and Finance made it an easy read. Also of great value was it comparisons of standard economic theory with various tools within Physics.

This book also provides a very complete Bibliography where one can find classical and neoclassical economic texts and further references and directions in this relatively new field. I highly reccomend it to any Physicist looking to go into Finance or just as a good read and also to (neo) classical econonomists and financial engineers alike.

I also deeply appreciated the respect it showed to economists and its straightforward, non preachy manner that many Physicists are often guilty of!

Thanks


Good Intro for me   February 23, 2008
M. Zivkovic
I am a physics grad student thinking about switching to finance. This book is a good start on that path.


Outstanding; singular   November 5, 2008
M. Travis (American West)
There is a great review online titled, "Statistical Phynance" by another author. It's on the American Scientist website. That is a great review.

I am an investment consultant but my undergrad work was physics and math (I also have a finance mba and have passed a few actuarial exams). I will admit I was a top student in both disciplines (math and physics) at very selective school, and Voit's exploration is not for the easily deterred. I'm sure most people who read this book are much smarter than me--after all, it's a physics text--but I make these comments to be helpful to those wandering over from other disciplines. I only wish I had the time to delve deeply into the subject matter, because that is what this text deserves. As it is, I can read it as an essay and rely on my background in statistics/physics/probability/finance for the intuition required to understand the author's analysis and conclusions--to an extent.

This book has me excited about the possible practical applications in my work; to be frank, I think it's revolutionary. But that's just me coming from my little corner of the world.