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The Volatility Smile (Wiley Finance)
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From the Inside Flap
The Volatility Smile provides an accessible account of both the classic Black-Scholes-Merton option model and the newer extensions of the model that have been developed over the past forty years. In contrast to textbooks that accentuate formality over intuition and understanding, The Volatility Smile explores both the ideas and the mathematics behind the models, walking a middle line between the rigor of the academic world and the practical insights of the trading desk. Based on a clear formulation of the principles of financial modeling, The Volatility Smile is also a book about how to evaluate and build financial models.Prior to the 1987 global stock market crash, the Black-Scholes-Merton option valuation model seemed to describe option markets reasonably well. Since the crash, however, equity index option markets have displayed a persistent volatility smile, in blatant disagreement with the Black-Scholes-Merton model. Quants around the world have labored over the preceding decades to extend the Black-Scholes-Merton model to accommodate this anomaly.Good financial models begin not with mathematics but with an understanding of the behavior of securities and markets. The first half of this book therefore focuses on the theory of option valuation, a study of the Black-Scholes-Merton model, illustrations of how to make practical use of it, and a discussion of its limitations. The second half provides an analysis of the empirical behavior of the volatility smile, and a detailed account of multiple ways in which the Black-Scholes-Merton model can be extended so as to rectify its inadequacies. In particular, the book provides a detailed account of the local volatility model, stochastic volatility models, and jump-diffusion.
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From the Back Cover
The Black-Scholes-Merton option model was the greatest innovation of twentieth century finance, and remains the most widely applied theory in all of finance. Nevertheless, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatility against strike will typically display a curve or smile, which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new ideas and models that try to reconcile theory with markets. Beginning with the principles of financial valuation, The Volatility Smile presents a unique and unified treatment of the Black-Scholes-Merton option model and the more advanced models that have replaced it. Celebrated author, quant, and co-originator of the local volatility model Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and the consequences of different assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Key features: The principles of valuation The Black-Scholes-Merton model Hedging strategies and transaction costs The behavior of the volatility smile Static and dynamic replication of standard and exotic options New models: their origin, implementation, and consequences Local volatility Stochastic volatility Jump-diffusion
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Product details
Series: Wiley Finance
Hardcover: 528 pages
Publisher: Wiley; 1 edition (September 6, 2016)
Language: English
ISBN-10: 9781118959169
ISBN-13: 978-1118959169
ASIN: 1118959167
Product Dimensions:
5.8 x 1.7 x 9.1 inches
Shipping Weight: 1.4 pounds (View shipping rates and policies)
Average Customer Review:
4.2 out of 5 stars
12 customer reviews
Amazon Best Sellers Rank:
#274,854 in Books (See Top 100 in Books)
Emanuel Derman’s “The Volatility Smile†is an excellent book for those who have learned something about derivatives and now need to think on their own.More than just repeating known formulas and theorems, the author is always careful to distinguish between theories and models, alternating concepts and practice (including end-of-chapter exercises).I really enjoyed Chapters 14 to 18, dealing with Local Volatility and its consequences. As one of the first quants (Bruno Dupire being the other) to develop and publish a local volatility model, Derman explains clearly what is the goal of the model and shows how to observe and test its assumptions.Recommended for those who are learning quantitative finance and an useful addition even to experienced practitioners, who might benefit from the clear expositions in the book in order to better understand how far their results should carry and how better to communicate them.
Somewhat basic introduction to volatility surfaces. Very long but doesn't cover advanced concepts in depth.Would recommend Bergomi for those looking to go deeper.
To explain the concepts, author relied on intuition first then on math.
Well written even for those with basic understanding of options math..
Emanuel Derman's books are always amazing and inspirational - My Life as A Quant, Models.Behaving.Badly and now The Volatility Smile, an excellent book full of insight and intuition, an outstanding guide for exciting volatility world!
I have read or at least looked at every book on vol smile published in the last 20 years. So I immediately ordered this book as soon as it was announced. Unfortunately, I was disappointed. There is no new research in this volume. It does have a nice summary of classic results, but most of these go back to mid-90s. If you are a financial engineering student, this book might suffice as an introduction into the field. But do not expect to find much on the causes of smile here. If you are an option trader, look elsewhere. I think I can get much more insight reading Fischer Black. If you are looking for math models, there are better books from the SocGen team - Bergomi, Labordere, Guyon.
The best book on vol modeling I have read
I am only 6 chapters in but have been enjoying it.
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