A benchmark approach to quantitative finance (Q2509124)

This book provides an introduction to quantitative finance. It offers an unified approach to risk and performance management by using the benchmark approach using the growth optimal portfolio as numeraire and the real world probability measure as pricing measure. It aims to stimulate interest in the benchmark approach by describing some of its power and wide applicability. It is intended for quantitative analysts postgraduate students, practioners in finance, economics and insurance. A reasonable mathematical or quantitative background is necessary. This book is multi-purpose. It is designed for three groups of users. Firstly, it provides useful information to financial analysts and practioners. Secondly, it aims to introduce those with a reasonable basic mathematical background. Thirdly, researchers may find the later parts of the book interesting and possibly challenging. The monograph has 15 chapters. The first two chapters summarizes fundamental results from probability theory and statistics. Chapters 3 and 4 introduce stochastic processes. Chapters 5--7 present the stochastic calculus for financial modeling using stochastic differential equations. In Chapter 8 basic financial derivatives are introduced from a hedging point of view. Chapter 9 presents various alternative priding methodologies as the concept of real world pricing. Several other pricing methods are shown to be special cases of real world pricing. Chapter 10 develops a unified modeling framework for continuous financial markets. It presents a range of new concepts and ideas. Chapter 11 derives results on portfolio optimization via maximizing the Sharp ratios. Chapter 12 discusses the modeling of stochastic volatility of stock market indices. Chapter 13 shows that the discounted growth optimal portfolio follows the dynamics of the time transformed squared Bessel process of dimension four. It follows the minimum market model. Long term derivatives can realistically priced. Chapter 14 analyses models that permit jumps to model event risk. Most of the results of previous chapters are generalized. Finally, Chapter 15 gives a brief introduction from the unifying perspective to basic numerical methods for quantitative finance, as scenario simulation, Monte Carlo simulation, tree based methods and finite difference methods.