Joerg Kienitz and Daniel Wetterau present “Financial Modelling: Theory, Implementation and Practice with MATLAB Source”, a great resource on state-of-the-art models in financial mathematics. The authors try to bridge the gap between current research topics and an implementation which can be applied in the real world. That means the authors are neither afraid of practical voodoo e.g. option trader terminology like “sticky delta” or “sticky strike”. Nor do the authors leave out current research results: A stochastic local-volatility LIBOR Market Model is discussed as well as the adjoint method for calculating Greeks with Monte Carlo.
Financial Modelling: Theory, Implementation and Practice with MATLAB Source (Wiley Finance) See at Amazon COM
Review
Form my point of view, the book is a very good reference for many models together with a reference implementation. The gap between theory and practical implementation is much smaller as in other books. But, the direct application of the algorithms in a real-life project is often not possible. The provided sources are rather a collection of algorithms and not a complete Matlab toolbox in that sense. For fulfilling this purpose, one would expect a framework with a consistent API across the algorithms and classes for managing and transforming market data inputs. E.g. a class for interest rates with transformation into discount factors or forward short-rates would help a lot. And a deeper class hierarchy for the different economic scenario generators would simplify the usage. But, this is left to the reader.
The explanations and derivations of the models are precise and clear. The presentation is good with minor deficits – e.g. sometimes the referenced figures appear several pages later. The part III of the book summarizes simple numerics and introduces basic concepts of Matlab. This seems somewhat redundant since there are much more focused books for numerics and Matlab programming.
In total, this book is a fantastic reference for everyone implementing state-of-the-art financial models.
Another great thing about this book is that the Matlab source codes are available for free download at http://www.mathworks.de/matlabcentral/fileexchange/authors/246981
The books outline:
Part I: Financial Markets and Popular Models
Chapter 1: Financial Derivatives – Data, Basics and Derivatives
Chapter 2: Diffusion Models
Chapter 3: Models with Jumps
Chapter 4: Multi-Dimensional Models
Part II: Numerical Methods and Recipes
Chapter 5: Option Pricing by Transformation and Direct Integration
Chapter 6: Advanced Topics Using Transform Techniques
Chapter 7: Monte Carlo Simulation and Applications
Chapter 8: Monte Carlo Simulation and Advanced Issues
Chapter 9: Calibration and Optimization
Chapter 10: Model Risk – Calibration, Pricing and Hedging
Part III: Implementation, Software Design and Mathematics
Chapter 11: Matlab – Basics
Chapter 12: Matlab Object Oriented Development
Chapter 13: Math Fundermentals
