The remarkable growth of financial markets over the past decades has been accompanied by an equally remarkable explosion in financial engineering, the interdisciplinary field focusing on applications of mathematical and statistical modeling and computational technology to problems in the financial services industry. The goals of financial engineering research are to develop empirically realistic stochastic models describing dynamics of financial risk variables, such as asset prices, foreign exchange rates, and interest rates, and to develop analytical, computational and statistical methods and tools to implement the models and employ them to design and evaluate financial products and processes to manage risk and to meet financial goals. This handbook describes the latest developments in this rapidly evolving field in the areas of modeling and pricing financial derivatives, building models of interest rates and credit risk, pricing and hedging in incomplete markets, risk management, and portfolio optimization. Leading researchers in each of these areas provide their perspective on the state of the art in terms of analysis, computation, and practical relevance. The authors describe essential results to date, fundamental methods and tools, as well as new views of the existing literature, opportunities, and challenges for future research.


Graduate students of finance, international business, and economics

Table of Contents

I. Introduction John Birge & Vadim Linetsky Chapter 1. A Partial Introduction to Financial Asset Pricing Theory Robert Jarrow & Philip Protter II. Derivative Securities: Models and Methods Chapter 2. Jump-Diffusion Models Steven Kou Chapter 3. Modeling Financial Security Returns Using Levy Processes Liuren Wu Chapter 4. Pricing with Wishart Risk Factors Christian Gourieroux & Razvan Sufana Chapter 5. Volatility Estimation Federico Bandi and Jeff Russell Chapter 6. Spectral Methods in Derivatives Pricing Vadim Linetsky Chapter 7. Variational Methods in Derivatives Pricing Liming Feng, Pavlo Kovalov & Vadim Linetsky Chapter 8. Discrete Path-Dependent Options Steven Kou III. Interest Rate and Credit Risk Models and Derivatives Chapter 9. Topics in Interest Rate Theory Tomas Bjork Chapter 10. Calculating Portfolio Credit Risk Paul Glasserman Chapter 11. Valuation of Basket Credit Derivatives in the Credit Migrations Environment Tomasz Bielecki, Stephane Crepey, Monique Jeanblanc & Marek Rutkowski IV. Incomplete Markets Chapter 12. Incomplete Markets Jeremy Staum Chapter 13. Option Pricing: Real and Risk-Neutral Distributions George Constantinides, Jens Jackwerth & Stylianos Perrakis Chapter 14. Total Risk Minimization Using Monte Carlo Simulations Thomas Coleman, Yuying Li & Maria-Cristina Patron


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© 2008
Elsevier Science
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About the editors

John Birge

Affiliations and Expertise

Robert R. McCormick School of Engineering, Northwestern University, Evanston, IL, U.S.A.

Vadim Linetsky

Affiliations and Expertise

Department of Industrial Engineering, Northwestern University, Evanston, IL, U.S.A.