The statistical mechanics of financial markets (Q2717138)

There are many correspondences in models of statistical physics and finance and the connections between them is as old as both fields. L. Bachelier e.g. derived in 1900 Brownian motion as a model of exchange quotes five years before A. Einstein introduced it in physics. The reason of this close relationship lies in the fact, that in both fields the stochastic behaviour results from a large number of interacting components, microscopic constituents resp. agents acting in the market. This book pursues these similarities applying physical models to financial markets. It is based on courses the author, a physicist, gave on this topic. He presents both established theories and new ideas, but warns the reader of the speculative character of the latter. The table of contents demonstrates the diverse issues: 1. Introduction, 2. Basic information on capital markets, 3. Random walks in finance and physics, 4. The Black-Scholes theory of option prices, 5. Scaling in financial data and in physics, 6. Turbulence and foreign exchange markets, 7. Risk control and derivative pricing in non-Gaussian markets, 8. Microscopic market models, 9. Theory of stock exchange crashes. The author succeeds in illustrating the inspiring parallels between statistical physics and finance. He does not restrict himself to a theoretical treatment, but also discusses the assumptions using empirical financial data. For completeness he provides the basic knowledge on financial markets. The mathematical presentation however is unsatisfactory. This refers above all to the description of stochastic processes. Stochastic differential equations, which are the basis for models of stock prices, are stated without specifying, in which sense they hold. One needs some knowledge in stochastic analysis to fill the gaps. From the intention of the author a rigorous treatment might be beyond the scope of the book. Nevertheless mathematicians will miss it. Despite these deficiencies the book remains a good representation of this interesting approach to finance and can be recommended mainly to researchers and students with some basic knowledge in statistical physics wanting to apply it to finance.