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Encyclopedia of Financial Models, 3 Volume Set

Book Description

An essential reference dedicated to a wide array of financial models, issues in financial modeling, and mathematical and statistical tools for financial modeling

The need for serious coverage of financial modeling has never been greater, especially with the size, diversity, and efficiency of modern capital markets. With this in mind, the Encyclopedia of Financial Models, 3 Volume Set has been created to help a broad spectrum of individuals—ranging from finance professionals to academics and students—understand financial modeling and make use of the various models currently available.

Incorporating timely research and in-depth analysis, the Encyclopedia of Financial Models is an informative 3-Volume Set that covers both established and cutting-edge models and discusses their real-world applications. Edited by Frank Fabozzi, this set includes contributions from global financial experts as well as academics with extensive consulting experience in this field. Organized alphabetically by category, this reliable resource consists of three separate volumes and 127 entries—touching on everything from asset pricing and bond valuation models to trading cost models and volatility—and provides readers with a balanced understanding of today's dynamic world of financial modeling.

  • This 3-Volume Set contains coverage of the fundamentals and advances in financial modeling and provides the mathematical and statistical techniques needed to develop and test financial models

  • Emphasizes both technical and implementation issues, providing researchers, educators, students, and practitioners with the necessary background to deal with issues related to financial modeling

  • Each volume includes a complete table of contents and index for easy access to various parts of the encyclopedia

Financial models have become increasingly commonplace, as well as complex. They are essential in a wide range of financial endeavors, and this 3-Volume Set will help put them in perspective.

Table of Contents

  1. Volume 1
    1. Title Page
    2. Copyright
    3. About the Editor
    4. Contributors
    5. Preface
      1. TOPIC CATEGORIES
    6. Guide to the Encyclopedia of Financial Models
      1. ORGANIZATION
    7. Asset Allocation
      1. Mean-Variance Model for Portfolio Selection
        1. SOME BASIC CONCEPTS
        2. MEASURING A PORTFOLIO’S EXPECTED RETURN
        3. MEASURING PORTFOLIO RISK
        4. PORTFOLIO DIVERSIFICATION
        5. CHOOSING A PORTFOLIO OF RISKY ASSETS
        6. ROBUST PORTFOLIO OPTIMIZATION
        7. KEY POINTS
        8. NOTES
        9. REFERENCES
      2. Principles of Optimization for Portfolio Selection
        1. UNCONSTRAINED OPTIMIZATION
        2. CONSTRAINED OPTIMIZATION
        3. KEY POINTS
        4. REFERENCES
      3. Asset Allocation and Portfolio Construction Techniques in Designing the Performance-Seeking Portfolio
        1. THE TANGENCY PORTFOLIO AS THE RATIONALE BEHIND SHARPE RATIO MAXIMIZATION
        2. ROBUST ESTIMATORS FOR COVARIANCE PARAMETERS
        3. ROBUST ESTIMATORS FOR EXPECTED RETURNS
        4. IMPLICATIONS FOR BENCHMARK PORTFOLIO CONSTRUCTION
        5. ASSET ALLOCATION MODELING: PUTTING THE EFFICIENT BUILDING BLOCKS TOGETHER
        6. KEY POINTS
        7. NOTES
        8. REFERENCES
    8. Asset Pricing Models
      1. General Principles of Asset Pricing
        1. ONE-PERIOD FINITE STATE ECONOMY
        2. PORTFOLIOS AND MARKET COMPLETENESS
        3. THE LAW OF ONE PRICE AND LINEAR PRICING
        4. ARBITRAGE AND POSITIVE STATE PRICING
        5. THE FUNDAMENTAL THEOREM OF ASSET PRICING
        6. DISCOUNT FACTOR MODELS
        7. STOCHASTIC DISCOUNT FACTORS
        8. KEY POINTS
        9. REFERENCES
      2. Capital Asset Pricing Models
        1. INTRODUCTION
        2. SHARPE-LINTNER CAPM
        3. ROY CAPM
        4. CONFUSIONS REGARDING THE CAPM
        5. TWO MEANINGS OF MARKET EFFICIENCY
        6. CAPM INVESTORS DO NOT GET PAID FOR BEARING RISK
        7. THE “TWO BETA” TRAP
        8. KEY POINTS
        9. NOTES
        10. REFERENCES
      3. Modeling Asset Price Dynamics
        1. FINANCIAL TIME SERIES
        2. BINOMIAL TREES
        3. ARITHMETIC RANDOM WALKS
        4. GEOMETRIC RANDOM WALKS
        5. MEAN REVERSION
        6. ADVANCED RANDOM WALK MODELS
        7. STOCHASTIC PROCESSES
        8. KEY POINTS
        9. REFERENCES
      4. Arbitrage Pricing: Finite-State Models
        1. THE ARBITRAGE PRINCIPLE
        2. ARBITRAGE PRICING IN A ONE-PERIOD SETTING
        3. ARBITRAGE PRICING IN A MULTIPERIOD FINITE-STATE SETTING
        4. THE BINOMIAL MODEL
        5. ARBITRAGE PRICING IN A DISCRETE-TIME, CONTINUOUS-STATE SETTING
        6. KEY POINTS
        7. NOTES
        8. REFERENCES
      5. Arbitrage Pricing: Continuous-State, Continuous-Time Models
        1. THE ARBITRAGE PRINCIPLE IN CONTINUOUS TIME
        2. ARBITRAGE PRICING IN CONTINUOUS-STATE, CONTINUOUS-TIME
        3. OPTION PRICING
        4. STATE-PRICE DEFLATORS
        5. EQUIVALENT MARTINGALE MEASURES
        6. EQUIVALENT MARTINGALE MEASURES AND GIRSANOV'S THEOREM
        7. EQUIVALENT MARTINGALE MEASURES AND COMPLETE MARKETS
        8. EQUIVALENT MARTINGALE MEASURES AND STATE PRICES
        9. ARBITRAGE PRICING WITH A PAYOFF RATE
        10. IMPLICATIONS OF THE ABSENCE OF ARBITRAGE
        11. WORKING WITH EQUIVALENT MARTINGALE MEASURES
        12. KEY POINTS
        13. NOTES
        14. REFERENCES
    9. Bayesian Analysis and Financial Modeling Applications
      1. Basic Principles of Bayesian Analysis
        1. THE LIKELIHOOD FUNCTION
        2. BAYES’ THEOREM
        3. KEY POINTS
        4. NOTES
        5. REFERENCES
      2. Introduction to Bayesian Inference
        1. PRIOR INFORMATION
        2. POSTERIOR INFERENCE
        3. BAYESIAN PREDICTIVE INFERENCE
        4. ILLUSTRATION: POSTERIOR TRADE-OFF AND THE NORMAL MEAN PARAMETER
        5. KEY POINTS
        6. NOTES
        7. REFERENCES
      3. Bayesian Linear Regression Model
        1. THE UNIVARIATE LINEAR REGRESSION MODEL
        2. THE MULTIVARIATE LINEAR REGRESSION MODEL
        3. KEY POINTS
        4. NOTES
        5. REFERENCES
      4. Bayesian Estimation of ARCH-Type Volatility Models
        1. BAYESIAN ESTIMATION OF THE GARCH(1,1) MODEL
        2. MARKOV-SWITCHING GARCH MODELS
        3. APPENDIX: THE GRIDDY GIBBS SAMPLER
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      5. Bayesian Techniques and the Black-Litterman Model
        1. PRACTICAL PROBLEMS ENCOUNTERED IN MEAN-VARIANCE OPTIMIZATION
        2. SHRINKAGE ESTIMATION
        3. THE BLACK-LITTERMAN MODEL
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
    10. Bond Valuation
      1. Basics of Bond Valuation
        1. GENERAL PRINCIPLES OF BOND VALUATION
        2. ARBITRAGE-FREE BOND VALUATION
        3. KEY POINTS
        4. NOTES
        5. REFERENCES
      2. Relative Value Analysis of Fixed-Income Products
        1. YIELD SPREADS OVER SWAP AND TREASURY CURVES
        2. ASSET SWAPS
        3. CREDIT DEFAULT SWAPS
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      3. Yield Curves and Valuation Lattices
        1. THE INTEREST RATE LATTICE
        2. CALIBRATING THE LATTICE
        3. USING THE LATTICE FOR VALUATION
        4. KEY POINTS
        5. NOTE
        6. REFERENCES
      4. Using the Lattice Model to Value Bonds with Embedded Options, Floaters, Options, and Caps/Floors
        1. FIXED-COUPON BONDS WITH EMBEDDED OPTIONS
        2. FLOATING-COUPON BONDS WITH EMBEDDED OPTIONS
        3. VALUING CAPS AND FLOORS
        4. VALUATION OF TWO MORE EXOTIC STRUCTURES
        5. VALUING AN OPTION ON A BOND
        6. EXTENSIONS
        7. KEY POINTS
        8. NOTES
        9. REFERENCES
      5. Understanding the Building Blocks for OAS Models
        1. IS IT EQUILIBRIUM OR AN ARBITRAGE MODEL?
        2. WHICH IS THE RIGHT MODEL OF THE INTEREST RATE PROCESS?
        3. TERM STRUCTURE MODELS: WHICH IS THE RIGHT APPROACH FOR OAS?
        4. IS THERE A RIGHT WAY TO MODEL PREPAYMENTS?
        5. KEY POINTS
        6. NOTES
        7. REFERENCES
      6. Quantitative Models to Value Convertible Bonds
        1. ANALYTICAL MODELS
        2. NUMERICAL MODELS
        3. KEY POINTS
        4. REFERENCES
      7. Quantitative Approaches to Inflation-Indexed Bonds
        1. BOND STRUCTURES AND THE CONCEPT OF REAL YIELD
        2. INFLATION-INDEXED BONDS IN A NOMINAL PORTFOLIO
        3. ADVANCED ANALYTICAL APPROACHES TO INFLATION-INDEXED BONDS
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
    11. Credit Risk Modeling
      1. An Introduction to Credit Risk Models
        1. KEY OBJECTIVES IN CREDIT RISK MODELING
        2. RATINGS AND “CREDIT SCORES” VERSUS DEFAULT PROBABILITIES
        3. WHAT “THROUGH THE CYCLE” REALLY MEANS
        4. VALUATION, PRICING, AND HEDGING
        5. EMPIRICAL DATA ON CREDIT SPREADS AND COMMON STOCK PRICES
        6. STRUCTURAL MODELS OF RISKY DEBT
        7. REDUCED-FORM MODELS OF RISKY DEBT
        8. EMPIRICAL EVIDENCE ON MODEL PERFORMANCE
        9. KEY POINTS
        10. NOTES
        11. REFERENCES
      2. Default Correlation in Intensity Models for Credit Risk Modeling
        1. PRELIMINARIES
        2. SINGLE ENTITY
        3. DEFAULT CORRELATION
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      3. Structural Models in Credit Risk Modeling
        1. REVIEW OF STRUCTURAL MODELS
        2. SINGLE FIRM
        3. DEFAULT CORRELATION
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      4. Modeling Portfolio Credit Risk
        1. ELEMENTS OF CREDIT RISK
        2. KEY POINTS
        3. REFERENCES
      5. Simulating the Credit Loss Distribution
        1. MONTE CARLO METHODS
        2. KEY POINTS
        3. REFERENCES
      6. Managing Credit Spread Risk Using Duration Times Spread (DTS)
        1. THE DTS CONCEPT
        2. DTS AS BETA-ADJUSTED SPREAD DURATION
        3. THE RELATION BETWEEN SPREAD VOLATILITY AND SPREAD LEVEL
        4. DTS AND EXCESS RETURN VOLATILITY
        5. IMPLICATIONS OF DTS FOR PORTFOLIO MANAGERS
        6. KEY POINTS
        7. NOTES
        8. REFERENCES
      7. Credit Spread Decomposition
        1. REVEALING THE DRIVERS OF CREDIT SPREADS
        2. CREDIT SPREAD DECOMPOSITION: MODEL SPECIFICATION AND IMPLEMENTATION
        3. INTERPRETING THE RESULTS OF THE CREDIT SPREAD DECOMPOSITION MODEL
        4. APPLICATIONS OF CREDIT SPREAD DECOMPOSITION
        5. ALTERNATIVE CREDIT SPREAD DECOMPOSITION MODELS
        6. KEY POINTS
        7. NOTES
        8. REFERENCES
      8. Credit Derivatives and Hedging Credit Risk
        1. CREDIT PORTFOLIO MODELING: WHAT’S THE HEDGE?
        2. THE MERTON MODEL AND ITS VARIANTS: TRANSACTION-LEVEL HEDGING
        3. THE MERTON MODEL AND ITS VARIANTS: PORTFOLIO- LEVEL HEDGING
        4. CREDIT DEFAULT SWAPS AND HEDGING
        5. PORTFOLIO- AND TRANSACTION-LEVEL HEDGING USING TRADED MACROECONOMIC INDICES
        6. KEY POINTS
        7. NOTES
        8. REFERENCES
    12. Derivatives Valuation
      1. No-Arbitrage Price Relations for Forwards, Futures, and Swaps
        1. UNDERSTANDING CARRY COSTS/BENEFITS
        2. VALUING FORWARDS
        3. VALUING FUTURES
        4. HEDGING WITH FUTURES
        5. SUMMARY
        6. IMPLYING FORWARD NET CARRY RATES
        7. VALUING SWAPS
        8. KEY POINTS
        9. NOTES
        10. REFERENCES
      2. No-Arbitrage Price Relations for Options
        1. OPTIONS AND FORWARDS
        2. CONTINUOUS RATES
        3. DISCRETE FLOWS
        4. NO-ARBITRAGE FUTURES OPTIONS RELATIONS
        5. NO-ARBITRAGE INTERMARKET RELATIONS
        6. KEY POINTS
        7. NOTES
        8. REFERENCES
      3. Introduction to Contingent Claims Analysis
        1. STATES OF THE WORLD
        2. CONTINGENT CLAIMS AND THEIR VALUE
        3. INVESTOR’S UTILITY MAXIMIZATION IN CONTINGENT CLAIMS MARKETS
        4. INCOMPLETE MARKETS FOR CONTINGENT CLAIMS
        5. FINANCIAL INSTRUMENTS AS CONTINGENT CLAIMS
        6. KEY POINTS
        7. REFERENCES
      4. Black-Scholes Option Pricing Model
        1. MOTIVATION
        2. BLACK-SCHOLES FORMULA
        3. COMPUTING A CALL OPTION PRICE
        4. SENSITIVITY OF OPTION PRICE TO A CHANGE IN FACTORS: THE GREEKS
        5. COMPUTING A PUT OPTION PRICE
        6. ASSUMPTIONS UNDERLYING THE BLACK-SCHOLES MODEL AND BASIC EXTENSIONS
        7. BLACK-SCHOLES MODEL APPLIED TO THE PRICING OF OPTIONS ON BONDS: IMPORTANCE OF ASSUMPTIONS
        8. KEY POINTS
        9. References
      5. Pricing of Futures/Forwards and Options
        1. PRICING OF FUTURES/FORWARD CONTRACTS
        2. PRICING OF OPTIONS
        3. KEY POINTS
        4. REFERENCES
      6. Pricing Options on Interest Rate Instruments
        1. MODELING THE TERM STRUCTURE AND BOND PRICES
        2. MODELING IN PRACTICE
        3. HJM METHODOLOGY
        4. BOND OPTION PRICING
        5. PRACTICAL CONSIDERATIONS
        6. KEY POINTS
        7. REFERENCES
      7. Basics of Currency Option Pricing Models
        1. BASIC PROPERTIES
        2. THEORETICAL VALUATION
        3. BLACK-SCHOLES MODEL
        4. EXAMPLES OF OTHER MODELS
        5. PRICING WITHOUT A COMPUTER MODEL
        6. THE PRICE OF AN OPTION
        7. THE GREEKS
        8. KEY POINTS
        9. REFERENCES
      8. Credit Default Swap Valuation
        1. DEFAULT SWAPS
        2. CREDIT EVENTS
        3. PRICING CREDIT DEFAULT SWAPS BY STATIC REPLICATION
        4. PRICING OF A SINGLE-NAME CREDIT DEFAULT SWAP
        5. KEY POINTS
        6. NOTES
        7. REFERENCES
      9. Valuation of Fixed Income Total Return Swaps
        1. AN INTUITIVE APPROACH
        2. USING THE DUFFIE- SINGLETON MODEL
        3. THE FORWARD MEASURE
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      10. Pricing of Variance, Volatility, Covariance, and Correlation Swaps
        1. DESCRIPTION OF SWAPS
        2. MODELING AND PRICING OF VARIANCE, VOLATILITY, COVARIANCE, AND CORRELATION SWAPS WITH STOCHASTIC VOLATILITY
        3. NUMERICAL EXAMPLE: VOLATILITY SWAP FOR S&P60 CANADA INDEX
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      11. Modeling, Pricing, and Risk Management of Assets and Derivatives in Energy and Shipping
        1. ENERGY COMMODITY PRICE MODELS
        2. VALUATION AND HEDGING OF DERIVATIVES
        3. APPLICATIONS
        4. KEY POINTS
        5. REFERENCES
    13. Index
  2. Volume 2
    1. Title Page
    2. Copyright
    3. About the Editor
    4. Contributors
    5. Preface
      1. TOPIC CATEGORIES
    6. Guide to the Encyclopedia of Financial Models
      1. ORGANIZATION
    7. Equity Models and Valuation
      1. Dividend Discount Models
        1. DIVIDEND MEASURES
        2. DIVIDENDS AND STOCK PRICES
        3. BASIC DIVIDEND DISCOUNT MODELS
        4. THE FINITE LIFE GENERAL DIVIDEND DISCOUNT MODEL
        5. CONSTANT GROWTH DIVIDEND DISCOUNT MODEL
        6. MULTIPHASE DIVIDEND DISCOUNT MODELS
        7. STOCHASTIC DIVIDEND DISCOUNT MODELS
        8. EXPECTED RETURNS AND DIVIDEND DISCOUNT MODELS
        9. KEY POINTS
        10. REFERENCES
      2. Discounted Cash Flow Methods for Equity Valuation
        1. DIVIDEND DISCOUNT MODEL
        2. CONSTANT-GROWTH DDM
        3. NONCONSTANT-GROWTH DDM
        4. INTUITION BEHIND THE DDM
        5. COMPLICATIONS IN IMPLEMENTING THE DDM IN THE REAL WORLD
        6. ADAPTING TO THE COMPLICATIONS: THE EARNINGS PER SHARE APPROACH
        7. FREE CASH FLOW DCF MODEL—TOTAL FIRM VALUATION
        8. CALCULATING FCF
        9. USING THE CASH-FLOW STATEMENT TO ARRIVE AT OCF AND FCF
        10. VALUING THE TOTAL FIRM
        11. ESTIMATING TOTAL FIRM VALUE USING THE FCF MODEL
        12. KEY POINTS
        13. REFERENCES
      3. Relative Valuation Methods for Equity Analysis
        1. BASIC PRINCIPLES OF RELATIVE VALUATION
        2. HYPOTHETICAL EXAMPLE
        3. KEY POINTS
        4. NOTES
        5. REFERENCES
      4. Equity Analysis in a Complex Market
        1. AN INTEGRATED APPROACH TO A SEGMENTED MARKET
        2. DISENTANGLING
        3. CONSTRUCTING, TRADING, AND EVALUATING PORTFOLIOS
        4. PROFITING FROM COMPLEXITY
        5. KEY POINTS
        6. NOTES
        7. REFERENCES
      5. Equity Portfolio Selection Models in Practice
        1. PORTFOLIO CONSTRAINTS COMMONLY USED IN PRACTICE
        2. BENCHMARK EXPOSURE AND TRACKING ERROR MINIMIZATION
        3. INCORPORATING TRANSACTION COSTS
        4. INCORPORATING TAXES
        5. MULTIACCOUNT OPTIMIZATION
        6. ROBUST PARAMETER ESTIMATION
        7. PORTFOLIO RESAMPLING
        8. ROBUST PORTFOLIO OPTIMIZATION
        9. KEY POINTS
        10. NOTES
        11. REFERENCES
      6. Basics of Quantitative Equity Investing
        1. EQUITY INVESTING
        2. FUNDAMENTAL VS. QUANTITATIVE INVESTOR
        3. THE QUANTITATIVE STOCK SELECTION MODEL
        4. THE OVERALL QUANTITATIVE INVESTMENT PROCESS
        5. RESEARCH
        6. PORTFOLIO CONSTRUCTION
        7. MONITORING
        8. CURRENT TRENDS
        9. KEY POINTS
        10. NOTES
      7. Quantitative Equity Portfolio Management
        1. TRADITIONAL AND QUANTITATIVE APPROACHES TO EQUITY PORTFOLIO MANAGEMENT
        2. FORECASTING STOCK RETURNS, RISKS, AND TRANSACTION COSTS
        3. CONSTRUCTING PORTFOLIOS
        4. TRADING
        5. EVALUATING RESULTS AND UPDATING THE PROCESS
        6. KEY POINTS
        7. REFERENCES
      8. Forecasting Stock Returns
        1. THE CONCEPT OF PREDICTABILITY
        2. A CLOSER LOOK AT PRICING MODELS
        3. PREDICTIVE RETURN MODELS
        4. IS FORECASTING MARKETS WORTH THE EFFORT?
        5. KEY POINTS
        6. NOTES
        7. REFERENCES
    8. Factor Models for Portfolio Construction
      1. Factor Models
        1. ARBITRAGE PRICING THEORY
        2. TYPES OF FACTOR MODELS
        3. FACTOR MODEL ESTIMATION
        4. USE OF PRINCIPAL COMPONENTS ANALYSIS
        5. KEY POINTS
        6. REFERENCES
      2. Principal Components Analysis and Factor Analysis
        1. FACTOR MODELS
        2. PRINCIPAL COMPONENTS ANALYSIS
        3. FACTOR ANALYSIS
        4. PCA AND FACTOR ANALYSIS COMPARED
        5. KEY POINTS
        6. REFERENCES
      3. Multifactor Equity Risk Models and Their Applications
        1. MOTIVATION
        2. EQUITY RISK FACTOR MODELS
        3. APPLICATIONS OF EQUITY RISK MODELS
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      4. Factor-Based Equity Portfolio Construction and Analysis
        1. FACTOR-BASED TRADING
        2. DEVELOPING FACTOR-BASED TRADING STRATEGIES
        3. RISK TO TRADING STRATEGIES
        4. DESIRABLE PROPERTIES OF FACTORS
        5. SOURCES FOR FACTORS
        6. BUILDING FACTORS FROM COMPANY CHARACTERISTICS
        7. WORKING WITH DATA
        8. ANALYSIS OF FACTOR DATA
        9. KEY POINTS
        10. NOTES
        11. REFERENCES
      5. Cross-Sectional Factor-Based Models and Trading Strategies
        1. CROSS-SECTIONAL METHODS FOR EVALUATION OF FACTOR PREMIUMS
        2. FACTOR MODELS
        3. PERFORMANCE EVALUATION OF FACTORS
        4. MODEL CONSTRUCTION METHODOLOGIES FOR A FACTOR-BASED TRADING STRATEGY
        5. BACKTESTING
        6. BACKTESTING OUR FACTOR TRADING STRATEGY
        7. KEY POINTS
        8. APPENDIX: THE COMPUSTAT POINT-IN-TIME, IBES CONSENSUS DATABASES AND FACTOR DEFINITIONS
        9. NOTES
        10. REFERENCES
      6. The Fundamentals of Fundamental Factor Models
        1. FUNDAMENTAL ANALYSIS AND THE BARRA FUNDAMENTAL FACTOR MODEL
        2. CRITICAL INSIGHTS FROM THE BARRA FUNDAMENTAL FACTOR MODEL
        3. RISK DECOMPOSITION
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      7. Multifactor Equity Risk Models and Their Applications
        1. MODEL DESCRIPTION AND ESTIMATION
        2. RISK DECOMPOSITION
        3. APPLICATIONS IN PORTFOLIO CONSTRUCTION AND RISK CONTROL
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      8. Multifactor Fixed Income Risk Models and Their Applications
        1. APPROACHES USED TO ANALYZE RISK
        2. APPLICATIONS OF RISK MODELING
        3. KEY POINTS
        4. NOTES
        5. REFERENCES
    9. Financial Econometrics
      1. Scope and Methods of Financial Econometrics
        1. THE DATA GENERATING PROCESS
        2. FINANCIAL ECONOMETRICS AT WORK
        3. TIME HORIZON OF MODELS
        4. APPLICATIONS
        5. KEY POINTS
        6. REFERENCES
      2. Regression Analysis: Theory and Estimation
        1. THE CONCEPT OF DEPENDENCE
        2. REGRESSIONS AND LINEAR MODELS
        3. ESTIMATION OF LINEAR REGRESSIONS
        4. SAMPLING DISTRIBUTIONS OF REGRESSIONS
        5. DETERMINING THE EXPLANATORY POWER OF A REGRESSION
        6. USING REGRESSION ANALYSIS IN FINANCE
        7. NONNORMALITY AND AUTOCORRELATION OF THE RESIDUALS
        8. PITFALLS OF REGRESSIONS
        9. KEY POINTS
        10. NOTES
        11. REFERENCES
      3. Categorical and Dummy Variables in Regression Models
        1. INDEPENDENT CATEGORICAL VARIABLES
        2. DEPENDENT CATEGORICAL VARIABLES
        3. KEY POINTS
        4. NOTE
        5. REFERENCES
      4. Quantile Regression
        1. COMPARING QUANTILE AND OLS APPROACHES
        2. REASONS FOR USING QUANTILE METHODS
        3. BACKGROUND AND FURTHER EXAMPLES
        4. KEY POINTS
        5. REFERENCES
      5. ARCH/GARCH Models in Applied Financial Econometrics
        1. REVIEW OF LINEAR REGRESSION AND AUTOREGRESSIVE MODELS
        2. ARCH/GARCH MODELS
        3. WHY ARCH/GARCH?
        4. GENERALIZATIONS OF THE ARCH/GARCH MODELS
        5. KEY POINTS
        6. REFERENCES
      6. Classification and Regression Trees and Their Use in Financial Modeling
        1. TECHNICAL DETAILS
        2. TREE PRUNING
        3. STRENGTHS AND WEAKNESSES OF CART
        4. APPLICATION OF CART IN STOCK SELECTION
        5. KEY POINTS
        6. NOTE
        7. ACKNOWLEDGMENT
        8. REFERENCES
      7. Applying Cointegration to Problems in Finance
        1. STATIONARY AND NONSTATIONARY VARIABLES AND COINTEGRATION
        2. TESTING FOR COINTEGRATION
        3. KEY POINTS
        4. NOTES
        5. REFERENCES
      8. Nonlinearity and Nonlinear Econometric Models in Finance
        1. STUDY OF NONLINEARITY IN ECONOMETRICS AND STATISTICS
        2. NONLINEAR MODELS
        3. NONLINEARITY TESTS
        4. 1 MODELING
        5. FORECASTING
        6. 2 APPLICATION
        7. KEY POINTS
        8. REFERENCES
      9. Robust Estimates of Betas and Correlations
        1. OLS REVISITED
        2. THEIL-SEN REGRESSION
        3. ROBUST ESTIMATES OF BETA
        4. ROBUST ESTIMATES OF CORRELATION
        5. KEY POINTS
        6. REFERENCES
      10. Working with High-Frequency Data
        1. WHAT ARE HIGH-FREQUENCY DATA?
        2. HOW ARE HIGH-FREQUENCY DATA RECORDED?
        3. PROPERTIES OF HIGH-FREQUENCY DATA
        4. HIGH-FREQUENCY DATA ARE VOLUMINOUS
        5. HIGH-FREQUENCY DATA ARE SUBJECT TO BID-ASK BOUNCE
        6. HIGH-FREQUENCY DATA ARE IRREGULARLY SPACED IN TIME
        7. KEY POINTS
        8. REFERENCES
    10. Financial Modeling Principles
      1. Milestones in Financial Modeling
        1. THE PRECURSORS: PARETO, WALRAS, AND THE LAUSANNE SCHOOL
        2. PRICE DIFFUSION: BACHELIER
        3. THE RUIN PROBLEM IN INSURANCE: LUNDBERG
        4. THE PRINCIPLES OF INVESTMENT: MARKOWITZ
        5. UNDERSTANDING VALUE: MODIGLIANI AND MILLER
        6. EFFICIENT MARKETS: FAMA AND SAMUELSON
        7. CAPITAL ASSET PRICING MODEL: SHARPE, LINTNER, AND MOSSIN
        8. THE MULTIFACTOR CAPM: MERTON
        9. ARBITRAGE PRICING THEORY: ROSS
        10. ARBITRAGE, HEDGING, AND OPTION THEORY: BLACK, SCHOLES, AND MERTON
        11. KEY POINTS
        12. REFERENCES
      2. From Art to Financial Modeling
        1. THE ROLE OF INFORMATION TECHNOLOGY
        2. INTEGRATING QUALITATIVE AND QUANTITATIVE INFORMATION
        3. PRINCIPLES FOR ENGINEERING A SUITE OF MODELS
        4. KEY POINTS
        5. REFERENCES
      3. Basic Data Description for Financial Modeling and Analysis
        1. DATA TYPES
        2. FREQUENCY DISTRIBUTIONS
        3. EMPIRICAL CUMULATIVE FREQUENCY DISTRIBUTION
        4. DATA CLASSES
        5. CUMULATIVE FREQUENCY DISTRIBUTIONS
        6. KEY POINTS
        7. NOTES
        8. REFERENCES
      4. Time Series Concepts, Representations, and Models
        1. CONCEPTS OF TIME SERIES
        2. STYLIZED FACTS OF FINANCIAL TIME SERIES
        3. INFINITE MOVING-AVERAGE AND AUTOREGRESSIVE REPRESENTATION OF TIME SERIES
        4. ARMA REPRESENTATIONS
        5. INTEGRATED SERIES AND TRENDS
        6. APPENDIX
        7. KEY POINTS
        8. NOTE
        9. REFERENCES
      5. Extracting Risk-Neutral Density Information from Options Market Prices
        1. AN APPROPRIATE PARAMETRIC MODEL
        2. TWO PARAMETRIC MODELS FOR RND ESTIMATION
        3. FITTING THE MODELS TO DATA
        4. KEY POINTS
        5. NOTE
        6. REFERENCES
    11. Financial Statement Analysis
      1. Financial Statements
        1. ACCOUNTING PRINCIPLES
        2. INFORMATION CONVEYED BY THE BASIC FINANCIAL STATEMENTS
        3. ACCOUNTING FLEXIBILITY
        4. KEY POINTS
        5. NOTES
        6. REFERENCES
      2. Financial Ratio Analysis
        1. RATIOS AND THEIR CLASSIFICATION
        2. RETURN-ON-INVESTMENT RATIOS
        3. LIQUIDITY
        4. PROFITABILITY RATIOS
        5. ACTIVITY RATIOS
        6. FINANCIAL LEVERAGE RATIOS
        7. COMMON-SIZE ANALYSIS
        8. USING FINANCIAL RATIO ANALYSIS
        9. KEY POINTS
        10. REFERENCES
      3. Cash-Flow Analysis
        1. DIFFICULTIES WITH MEASURING CASH FLOW
        2. CASH FLOWS AND THE STATEMENT OF CASH FLOWS
        3. FREE CASH FLOW
        4. CALCULATING FREE CASH FLOW
        5. NET FREE CASH FLOW
        6. USEFULNESS OF CASH FLOWS IN FINANCIAL ANALYSIS
        7. KEY POINTS
        8. REFERENCES
    12. Finite Mathematics for Financial Modeling
      1. Important Functions and Their Features
        1. CONTINUOUS FUNCTION
        2. INDICATOR FUNCTION
        3. DERIVATIVES
        4. MONOTONIC FUNCTION
        5. INTEGRAL
        6. SOME FUNCTIONS
        7. KEY POINTS
        8. REFERENCES
      2. Time Value of Money
        1. IMPORTANCE OF THE TIME VALUE OF MONEY
        2. DETERMINING THE FUTURE VALUE
        3. DETERMINING THE PRESENT VALUE
        4. DETERMINING THE UNKNOWN INTEREST RATE
        5. DETERMINING THE NUMBER OF COMPOUNDING PERIODS
        6. THE TIME VALUE OF A SERIES OF CASH FLOWS
        7. VALUING CASH FLOWS WITH DIFFERENT TIME PATTERNS
        8. LOAN AMORTIZATION
        9. THE CALCULATION OF INTEREST RATES AND YIELDS
        10. KEY POINTS
        11. NOTE
        12. REFERENCES
      3. Fundamentals of Matrix Algebra
        1. VECTORS AND MATRICES DEFINED
        2. SQUARE MATRICES
        3. DETERMINANTS
        4. SYSTEMS OF LINEAR EQUATIONS
        5. LINEAR INDEPENDENCE AND RANK
        6. VECTOR AND MATRIX OPERATIONS
        7. MATRIX OPERATIONS
        8. EIGENVALUES AND EIGENVECTORS
        9. KEY POINTS
        10. NOTES
      4. Difference Equations
        1. THE LAG OPERATOR L
        2. HOMOGENEOUS DIFFERENCE EQUATIONS
        3. NONHOMOGENEOUS DIFFERENCE EQUATIONS
        4. SYSTEMS OF LINEAR DIFFERENCE EQUATIONS
        5. SYSTEMS OF HOMOGENEOUS LINEAR DIFFERENCE EQUATIONS
        6. KEY POINTS
        7. NOTE
        8. REFERENCES
      5. Differential Equations
        1. DIFFERENTIAL EQUATIONS DEFINED
        2. ORDINARY DIFFERENTIAL EQUATIONS
        3. SYSTEMS OF ORDINARY DIFFERENTIAL EQUATIONS
        4. CLOSED-FORM SOLUTIONS OF ORDINARY DIFFERENTIAL EQUATIONS
        5. NUMERICAL SOLUTIONS OF ORDINARY DIFFERENTIAL EQUATIONS
        6. NONLINEAR DYNAMICS AND CHAOS
        7. KEY POINTS
        8. NOTES
        9. REFERENCES
      6. Partial Differential Equations in Finance
        1. PARTIAL DIFFERENTIAL EQUATIONS FOR OPTION PRICING
        2. PRICING EUROPEAN OPTIONS WITH PDES
        3. PRICING AMERICAN OPTIONS WITH PDES
        4. CALIBRATION
        5. KEY POINTS
        6. NOTES
        7. REFERENCES
    13. Model Risk and Selection
      1. Model Risk
        1. MODELS AND MODEL RISK
        2. SOURCES OF MODEL RISK
        3. MANAGING MODEL RISK
        4. KEY POINTS
        5. REFERENCES
      2. Model Selection and Its Pitfalls
        1. MODEL SELECTION AND ESTIMATION
        2. THE (MACHINE) LEARNING APPROACH TO MODEL SELECTION
        3. SAMPLE SIZE AND MODEL COMPLEXITY
        4. DANGEROUS PATTERNS OF BEHAVIOR
        5. DATA SNOOPING
        6. SURVIVORSHIP BIASES AND OTHER SAMPLE DEFECTS
        7. MOVING TRAINING WINDOWS
        8. MODEL RISK
        9. MODEL SELECTION IN A NUTSHELL
        10. KEY POINTS
        11. REFERENCES
      3. Managing the Model Risk with the Methods of the Probabilistic Decision Theory
        1. AN OUTLINE OF PROBABLISTIC DECISION THEORY
        2. MODEL RISK OF A SIMPLE PORTFOLIO
        3. INVESTMENT IN A RISKY BOND
        4. KEY POINTS
        5. REFERENCES
      4. Fat-Tailed Models for Risk Estimation
        1. THE FUNDAMENTALS: NORMAL DISTRIBUTION
        2. INCORPORATING HEAVY TAILS AND SKEWNESS: PARAMETRIC FAT-TAILED MODELS
        3. INCORPORATING HEAVY TAILS AND SKEWNESS: SEMI-PARAMETRIC FAT-TAILED MODELS
        4. COMPARISON AMONG RISK MODELS
        5. KEY POINTS
        6. NOTES
        7. REFERENCES
    14. Index
  3. Volume 3
    1. Title Page
    2. Copyright
    3. About the Editor
    4. Contributors
    5. Preface
      1. TOPIC CATEGORIES
    6. Guide to the Encyclopedia of Financial Models
      1. Organization
    7. Mortgage-Backed Securities Analysis and Valuation
      1. Valuing Mortgage-Backed and Asset-Backed Securities
        1. CASH-FLOW YIELD ANALYSIS
        2. ZERO-VOLATILITY SPREAD
        3. VALUATION USING MONTE CARLO SIMULATION AND OAS ANALYSIS
        4. MEASURING INTEREST RISK
        5. KEY POINTS
        6. NOTES
      2. The Active-Passive Decomposition Model for MBS
        1. PATH-DEPENDENCE AND PRICING PARTIAL DIFFERENTIAL EQUATION
        2. EXTENDED ACTIVE-PASSIVE DECOMPOSITION MODEL
        3. EXTENSIONS AND NUANCES
        4. KEY POINTS
        5. NOTES
      3. Analysis of Nonagency Mortgage-Backed Securities
        1. FACTORS IMPACTING RETURNS FROM NONAGENCY MBS
        2. UNDERSTANDING THE EVOLUTION OF CREDIT PERFORMANCE WITHIN A TRANSACTION
        3. THE PROCESS OF ESTIMATING PRIVATE-LABEL MBS RETURNS
        4. KEY POINTS
        5. NOTES
      4. Measurement of Prepayments for Residential Mortgage-Backed Securities
        1. PREPAYMENT TERMINOLOGY
        2. CALCULATING PREPAYMENT SPEEDS
        3. DELINQUENCY, DEFAULT, AND LOSS TERMINOLOGY
        4. KEY POINTS
        5. NOTES
      5. Prepayments and Factors Influencing the Return of Principal for Residential Mortgage-Backed Securities
        1. PREPAYMENT FUNDAMENTALS
        2. FACTORS INFLUENCING PREPAYMENT SPEEDS
        3. DEFAULTS AND “INVOLUNTARY” PREPAYMENTS
        4. KEY POINTS
        5. NOTES
    8. Operational Risk
      1. Operational Risk
        1. Operational Risk Defined
        2. OPERATIONAL RISK EXPOSURE INDICATORS
        3. CLASSIFICATION OF OPERATIONAL RISK
        4. KEY POINTS
        5. NOTES
      2. Operational Risk Models
        1. OPERATIONAL RISK MODELS
        2. Specifics of Operational Loss Data
        3. KEY POINTS
        4. NOTES
      3. Modeling Operational Loss Distributions
        1. APPROACHES TO OPERATIONAL RISK MODELING
        2. NONPARAMETRIC APPROACH: EMPIRICAL DISTRIBUTION FUNCTION
        3. PARAMETRIC APPROACH: CONTINUOUS LOSS DISTRIBUTIONS
        4. EXTENSION: MIXTURE LOSS DISTRIBUTIONS
        5. A NOTE ON THE TAIL BEHAVIOR
        6. EMPIRICAL EVIDENCE WITH OPERATIONAL LOSS DATA
        7. KEY POINTS
        8. NOTES
    9. Optimization Tools
      1. Introduction to Stochastic Programming and Its Applications to Finance
        1. WHAT IS STOCHASTIC PROGRAMMING?
        2. STOCHASTIC PROGRAMMING VERSUS OTHER METHODS IN FINANCE
        3. A GENERAL MULTISTAGE STOCHASTIC PROGRAMMING MODEL FOR FINANCIAL PLANNING
        4. KEY POINTS
      2. Robust Portfolio Optimization
        1. THE ROBUST OPTIMIZATION APPROACH
        2. THE RELATIONSHIP TO BAYESIAN METHODS AND ECONOMIC THEORY
        3. USING ROBUST PORTFOLIO OPTIMIZATION IN PRACTICE
        4. PRACTICAL CONSIDERATIONS FOR ROBUST PORTFOLIO ALLOCATION
        5. FUTURE DIRECTIONS
        6. KEY POINTS
    10. Probability Theory
      1. Concepts of Probability Theory
        1. HISTORICAL DEVELOPMENT OF ALTERNATIVE APPROACHES TO PROBABILITY
        2. SET OPERATIONS AND PRELIMINARIES
        3. PROBABILITY MEASURE
        4. RANDOM VARIABLE
        5. KEY POINTS
        6. NOTES
      2. Discrete Probability Distributions
        1. DISCRETE LAW
        2. BERNOULLI DISTRIBUTION
        3. BINOMIAL DISTRIBUTION
        4. HYPERGEOMETRIC DISTRIBUTION
        5. MULTINOMIAL DISTRIBUTION
        6. POISSON DISTRIBUTION
        7. DISCRETE UNIFORM DISTRIBUTION
        8. APPENDIX B Binomial and Multinomial Coefficients
        9. BINOMIAL COEFFICIENT
        10. MULTINOMIAL COEFFICIENT
        11. KEY POINTS
        12. NOTE
      3. Continuous Probability Distributions
        1. CONTINUOUS PROBABILITY DISTRIBUTION DESCRIBED
        2. DISTRIBUTION FUNCTION
        3. DENSITY FUNCTION
        4. CONTINUOUS RANDOM VARIABLE
        5. COMPUTING PROBABILITIES FROM THE DENSITY FUNCTION
        6. LOCATION PARAMETERS
        7. DISPERSION PARAMETERS
        8. KEY POINTS
        9. NOTES
      4. Continuous Probability Distributions with Appealing Statistical Properties
        1. NORMAL DISTRIBUTION
        2. CHI-SQUARE DISTRIBUTION
        3. STUDENT'S t-DISTRIBUTION
        4. F-DISTRIBUTION
        5. EXPONENTIAL DISTRIBUTION
        6. RECTANGULAR DISTRIBUTION
        7. GAMMA DISTRIBUTION
        8. BETA DISTRIBUTION
        9. LOG-NORMAL DISTRIBUTION
        10. KEY POINTS
        11. NOTES
      5. Continuous Probability Distributions Dealing with Extreme Events
        1. GENERALIZED EXTREME VALUE DISTRIBUTION
        2. GENERALIZED PARETO DISTRIBUTION
        3. NORMAL INVERSE GAUSSIAN DISTRIBUTION
        4. α-STABLE DISTRIBUTION
        5. KEY POINTS
      6. Stable and Tempered Stable Distributions
        1. α-STABLE DISTRIBUTION
        2. TEMPERED STABLE DISTRIBUTIONS
        3. INFINITELY DIVISIBLE DISTRIBUTIONS
        4. HYPERGEOMETRIC FUNCTION AND CONFLUENT HYPERGEOMETRIC FUNCTION
        5. KEY POINTS
        6. NOTES
      7. Fat Tails, Scaling, and Stable Laws
        1. SCALING, STABLE LAWS, AND FAT TAILS
        2. EXTREME VALUE THEORY FOR IID PROCESSES
        3. ELIMINATING THE ASSUMPTION OF IID SEQUENCES
        4. KEY POINTS
        5. NOTES
      8. Copulas
        1. DRAWBACKS OF CORRELATION
        2. OVERCOMING THE DRAWBACKS OF CORRELATION: COPULAS
        3. MATHEMATICAL DEFINITION OF COPULAS
        4. KEY POINTS
        5. NOTES
      9. Applications of Order Statistics to Risk Management Problems
        1. PERFORMANCE OF VaR ESTIMATION
        2. VaR AND DIFFERENT LEVELS OF CONFIDENCE
        3. JOINT PROBABILITY DISTRIBUTIONS FOR ORDER STATISTICS
        4. DISTRIBUTION-FREE CONFIDENCE INTERVALS FOR VaR
        5. BIVARIATE ORDER STATISTICS
        6. KEY POINTS
        7. NOTE
    11. Risk Measures
      1. Measuring Interest Rate Risk: Effective Duration and Convexity
        1. EFFECTIVE DURATION AND EFFECTIVE CONVEXITY AN EXAMPLE
        2. PUTTING IT ALL TOGETHER
        3. KEY POINTS
        4. NOTES
      2. Yield Curve Risk Measures
        1. DURATION, CONVEXITY, AND NONPARALLEL YIELD CURVE SHIFTS
        2. CASH-FLOW DISTRIBUTION ANALYSIS VERSUS A BENCHMARK
        3. KEY RATE DURATION
        4. SLOPE ELASTICITY MEASURE
        5. YIELD CURVE RESHAPING DURATION
        6. ANALYSIS OF LIKELY YIELD CURVE SHIFTS
        7. KEY POINTS
        8. NOTE
      3. Value-at-Risk
        1. VALUE-AT-RISK DEFINED
        2. COMPUTING PORTFOLIO VaR IN PRACTICE
        3. BACK-TESTING OF VaR
        4. COHERENT RISK MEASURES
        5. KEY POINTS
        6. NOTES
      4. Average Value-at-Risk
        1. AVERAGE VALUE-AT-RISK DEFINED
        2. AVaR ESTIMATION FROM A SAMPLE
        3. COMPUTING PORTFOLIO AVAR IN PRACTICE
        4. BACK-TESTING OF AVaR
        5. TECHNICAL APPENDIX
        6. KEY POINTS
        7. NOTES
      5. Risk Measures and Portfolio Selection
        1. DESIRABLE FEATURES OF INVESTMENT RISK MEASURES
        2. ALTERNATIVE RISK MEASURES FOR PORTFOLIO SELECTION
        3. DISPERSION MEASURES
        4. SAFETY-FIRST RISK MEASURES
        5. KEY POINTS
        6. NOTES
      6. Back-Testing Market Risk Models
        1. STATISTICAL BACK-TESTING
        2. EXCEEDANCE-BASED STATISTICAL APPROACHES
        3. STATISTICAL BACK-TESTING OF VaRs AT MULTIPLE CONFIDENCE LEVELS
        4. USING BACK-TESTS FOR DIAGNOSTIC PURPOSES
        5. RANKING ALTERNATIVE MODELS
        6. KEY POINTS
      7. Estimating Liquidity Risks
        1. LIQUIDITY AND LIQUIDITY RISKS
        2. ESTIMATING LIQUIDITY-ADJUSTED VaR
        3. ESTIMATING LIQUIDITY-AT-RISK (LAR)
        4. ESTIMATING LIQUIDITY IN CRISES
        5. KEY POINTS
      8. Estimate of Downside Risk with Fat-Tailed and Skewed Models
        1. DOWNSIDE RISK MEASURE
        2. LÉVY STABLE DISTRIBUTION
        3. STUDENT'S t-DISTRIBUTION
        4. MIXTURE OF NORMAL DISTRIBUTIONS
        5. MODELING RETURN DISTRIBUTIONS FOR MAJOR INDEXES
        6. KEY POINTS
        7. NOTE
      9. Moving Average Models for Volatility and Correlation, and Covariance Matrices
        1. BASIC PROPERTIES OF COVARIANCE AND CORRELATION MATRICES
        2. EQUALLY WEIGHTED AVERAGES
        3. EXPONENTIALLY WEIGHTED MOVING AVERAGES
        4. KEY POINTS
    12. Software for Financial Modeling
      1. Introduction to Financial Model Building with MATLAB
        1. THE MATLAB DESKTOP AND EDITOR
        2. BASIC OPERATIONS AND MATRIX ARRAY CONSTRUCTION
        3. IMPORTANT MATLAB FUNCTIONS
        4. CREATING USER-DEFINED FUNCTIONS
        5. CONTROL FLOW STATEMENTS
        6. GRAPHS
        7. IMPORTING DATA AND INTERACTING WITH SPREADSHEETS
        8. EXAMPLES
        9. KEY POINTS
      2. Introduction to Visual Basic for Applications
        1. A SIMPLE EXAMPLE OF A VBA PROGRAM
        2. OBJECTS, PROPERTIES, AND METHODS
        3. PROGRAMMING TIPS
        4. DEBUGGING
        5. EXAMPLES
        6. KEY POINTS
        7. NOTE
    13. Stochastic Processes and Tools
      1. Stochastic Integrals
        1. THE INTUITION BEHIND STOCHASTIC INTEGRALS
        2. BROWNIAN MOTION DEFINED
        3. PROPERTIES OF BROWNIAN MOTION
        4. STOCHASTIC INTEGRALS DEFINED
        5. SOME PROPERTIES OF ITO STOCHASTIC INTEGRALS
        6. KEY POINTS
        7. NOTES
      2. Stochastic Differential Equations
        1. THE INTUITION BEHIND STOCHASTIC DIFFERENTIAL EQUATIONS
        2. ITÔ PROCESSES
        3. THE ONE-DIMENSIONAL ITÔ FORMULA
        4. STOCHASTIC DIFFERENTIAL EQUATIONS
        5. GENERALIZATION TO SEVERAL DIMENSIONS
        6. SOLUTION OF STOCHASTIC DIFFERENTIAL EQUATIONS
        7. KEY POINTS
        8. NOTE
      3. Stochastic Processes in Continuous Time
        1. SOME PRELIMINARIES
        2. POISSON PROCESS
        3. PURE JUMP PROCESS
        4. BROWNIAN MOTION
        5. TIME-CHANGED BROWNIAN MOTION
        6. LéVY PROCESS
        7. KEY POINTS
      4. Conditional Expectation and Change of Measure
        1. EVENTS, σ-FIELDS, AND FILTRATION
        2. CONDITIONAL EXPECTATION
        3. CHANGE OF MEASURES
        4. KEY POINTS
        5. NOTES
      5. Change of Time Methods
        1. CHANGE OF TIME METHOD
        2. APPLICATIONS OF CHANGE OF TIME METHOD
        3. KEY POINTS
        4. NOTES
    14. Term Structure Modeling
      1. The Concept and Measures of Interest Rate Volatility
        1. BASIC DEFINITIONS AND FIRST FINDINGS
        2. A DIFFUSIVE MODEL FOR RANDOMNESS
        3. MEAN REVERSION AND MARKET STABILITY
        4. THE RATE DISTRIBUTION
        5. INTEREST RATE JUMPS
        6. KEY POINTS
        7. ACKNOWLEDGMENTS
      2. Short-Rate Term Structure Models
        1. THE CONCEPT OF SHORT-RATE MODELING
        2. SINGLE-FACTOR SHORT-RATE MODELS
        3. WHICH MODEL IS BETTER?
        4. ADDING A SECOND FACTOR TO SHORT-RATE MODELS
        5. THE CONCEPT OF AFFINE MODELING
        6. KEY POINTS
        7. ACKNOWLEDGMENTS
      3. Static Term Structure Modeling in Discrete and Continuous Time
        1. INTRODUCTION TO TERM STRUCTURE MODELING
        2. TERM STRUCTURE MODELS
        3. DISCRETE-TIME MODELS OF THE TERM STRUCTURE
        4. DISCOUNT FUNCTION
        5. SPOT YIELD CURVE
        6. IMPLIED FORWARD RATE
        7. TERM STRUCTURE IN A CERTAIN ECONOMY
        8. TERM STRUCTURE IN THE REAL WORLD—NOTHING IS CERTAIN
        9. CONTINUOUS-TIME MODELS OF THE TERM STRUCTURE
        10. DISCOUNT FUNCTION
        11. FORWARD RATE
        12. TERM STRUCTURE IN CONTINUOUS TIME
        13. KEY POINTS
      4. The Dynamic Term Structure Model
        1. KEY ELEMENTS IN A DYNAMIC TERM STRUCTURE MODEL
        2. EQUILIBRIUM
        3. ARBITRAGE-FREE
        4. CONTINUOUS TIME/CONTINUOUS STATE
        5. COMPLETENESS OF MARKETS
        6. DYNAMIC TERM STRUCTURE MODEL
        7. SPOT-RATE MODEL
        8. BOND-PRICE VALUATION MODEL
        9. THE TERM STRUCTURE
        10. APPLICATIONS OF THE TERM STRUCTURE MODEL
        11. TERM STRUCTURE OF FORWARD RATES
        12. HEATH, JARROW, AND MORTON MODEL OF THE TERM STRUCTURE
        13. MARKET PRICE OF RISK
        14. BOND PRICING
        15. CHANGE OF NUMERAIRE
        16. MARKET MODELS
        17. INTEREST RATE DERIVATIVES
        18. DESIGNING YOUR NEXT MODEL
        19. KEY POINTS
      5. Essential Classes of Interest Rate Models and Their Use
        1. CATEGORIZATION OF APPROACHES TO TERM STRUCTURE MODELING
        2. WHEN DO I USE EACH OF THE MODELING APPROACHES?
        3. USING MODELS OF BORROWER BEHAVIOR WITH A RISK-NEUTRAL INTEREST RATE MODEL
        4. KEY POINTS
        5. NOTES
      6. A Review of No Arbitrage Interest Rate Models
        1. THE GENERAL MODELS FOR THE SHORT RATE
        2. BINOMIAL AND TRINOMIAL SOLUTIONS TO THE STOCHASTIC DIFFERENTIAL EQUATIONS
        3. COMPARATIVE STUDY OF THE NUMERICAL SOLUTIONS
        4. APPENDIX
        5. KEY POINTS
        6. NOTES
    15. Trading Cost Models
      1. Modeling Market Impact Costs
        1. MARKET IMPACT COSTS
        2. LIQUIDITY AND TRANSACTION COSTS
        3. MARKET IMPACT MEASUREMENTS AND EMPIRICAL FINDINGS
        4. FORECASTING AND MODELING MARKET IMPACT
        5. KEY POINTS
        6. NOTES
    16. Volatility
      1. Monte Carlo Simulation in Finance
        1. MAIN IDEAS AND IMPORTANT CONCEPTS
        2. FINANCIAL APPLICATIONS OF SIMULATION
        3. RANDOM NUMBER GENERATION
        4. VARIANCE REDUCTION TECHNIQUES
        5. SIMULATION SOFTWARE
        6. KEY POINTS
        7. NOTES
      2. Stochastic Volatility
        1. NONSTOCHASTIC VOLATILITY MEASURES
        2. KEY POINTS
        3. NOTES
    17. Index