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MATHEMATICAL FINANCE ARTICLES




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Derivatives pricing



PROBLEMS

The mathematics of pricing financial derivatives makes the implicit assumption that the markets are random and efficient; specifically, this means that the Random Walk Hypothesis and the Efficient Market Hypothesis are at the heart of the body of knowledge. Both theories, despite being widely accepted in the academic communities, plainly fail to explain various market phenomenae, such as:
  • the trends that are observable in markets, even when no new information or news is entering the market-place

  • the occurence of "once in a lifetime" financial crises is much more frequent that "once in a lifetime"

  • the consistent outperformance of investors such as George Soros and Warren Buffett , which are usually unconvincingly explained away as "one offs"

  • trading desk disregard for academic theory, and the observation that academic qualification is frequently a hindrance to trading desk success


Whilst the maths deployed in the world of derivatives is mathematically sound and has been developed by many brilliant minds, it remains a problem for the derivatives business that the theories upon which it is based are in frequent conflict with observable reality.


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EXTERNAL LINKS

  • [http://www.bus.lsu.edu/academics/finance/faculty/dchance/Instructional/Instr.htm Prof. Don M. Chance] - technical notes covering derivatives and related material

  • Prof. Peter Carr ( PDF ) - FAQs in Option Pricing Theory

  • finmath.com - Mathematical finance Reading List

  • Global Derivatives Quantitative Mathematics Glossary

  • Option Valuation , Prof. Campbell R. Harvey

  • [http://www.isda.org/ ISDA.org] - The International Swaps and Derivatives Association

  • Option Tutor - a visual presentation of modern option pricing theory

  • Quantnotes.com - articles covering mathematical finance

  • Riskglossary.com - online glossary, encyclopedia, and resource locator

  • Riskworx.com - discussion of the application and theory of derivatives

  • rmetrics.org - R based environment for teaching financial engineering and computational finance

  • Moneyscience.org - open-access, multi disciplinary resource for academics and practitioners.

  • TheQUANTsterBlog - informational resource with links, events and jobs.

  • QuantFinanceJob.com - A community with quantitative finance guides, interview tips, book reviews and interview questions for Ph.Ds in physics,math and engineering to land a successful financial engineering job.

  • QuantFinanceJobs.com - Specialist job board for quantitative finance, financial engineering and risk management.

  • Econophysics Blog

  • Financial Maths articles and lecture notes - Some articles as introduction to financial mathematics and lecture notes from great teachers, Simon Leger's website

  • QUANTster.com - The Quantitative Finance Job Market Daily. THE source for Quants in North America.