Электронная книга: Emanuel Derman «The Volatility Smile»

The Volatility Smile

The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models The first half of the book, Chapters 1 through 13, can serve as a standalone textbook for a course on option valuation and the Black-Scholes-Merton model, presenting the principles of financial modeling, several derivations of the model, and a detailed discussion of how it is used in practice. The second half focuses on the behavior of the volatility smile, and, in conjunction with the first half, can be used for as the basis for a more advanced course.

Издательство: "John Wiley&Sons Limited (USD)"

ISBN: 9781118959176

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Emanuel Derman

Emanuel Derman
Born Cape Town, South Africa
Residence New York City, New York, United States
Citizenship United States
Fields particle physics, financial engineering
Institutions Goldman Sachs
Salomon Brothers
Columbia University
Alma mater Columbia University
University of Cape Town
Doctoral advisor Norman Christ
Known for Financial Modelers' Manifesto
Black-Derman-Toy model
Local volatility
Derman-Kani Model
Notable awards 2000 Financial Engineer of the Year

Emanuel Derman is a South African-born academic,[1] businessman and writer. He is best known as a quantitative analyst, and author of the book My Life as A Quant: Reflections on Physics and Finance.[2]

He is a co-author of Black-Derman-Toy model, one of the first interest-rate models, and the Derman-Kani local volatility or implied tree model, a model consistent with the volatility smile.

He is currently a professor at Columbia University[3] and Director of its program in financial engineering, and is also the Head of Risk and a partner at Prisma Capital Partners, a fund of funds. His book My Life as A Quant: Reflections on Physics and Finance, published by Wiley in September 2004, was one of Business Week's top ten books of the year for 2004.[4] His forthcoming book Models.Behaving.Badly, will be published by Free Press in October 2011.



Derman studied at the University of Cape Town,[5] and received a Ph.D. in theoretical physics from Columbia in 1973, where he wrote a thesis that proposed a test for a weak-neutral current in electron-hadron scattering. This experiment was carried out at SLAC in 1978 by a team led by Charles Prescott and Richard Taylor, and confirmed the Weinberg-Salam model. Between 1973 and 1980 he did research in theoretical particle physics at the University of Pennsylvania, the University of Oxford, Rockefeller University and the University of Colorado at Boulder. From 1980 to 1985 he worked at AT&T Bell Laboratories, where he developed computer languages for business modeling applications.

In 1985 Derman joined Goldman Sachs' fixed income division where he was one of the co-developers of the Black-Derman-Toy interest-rate model.

He left Goldman Sachs at the end of 1988[6] to take a position at Salomon Brothers Inc. as a Head of Adjustable Rate Mortgage Research in the Bond Portfolio Analysis group.

Rehired by Goldman Sachs, from 1990 to 2000 he led the Quantitative Strategies group in the Equities division, which pioneered the study of local volatility models and the volatility smile. He was appointed a managing director of Goldman Sachs in 1997. In 2000 he became head of the firm’s Quantitative Risk Strategies group. He retired from Goldman Sachs in 2002 and took up his current positions at Columbia University and Prisma Capital Partners.

Derman was named the IAFE/Sungard Financial Engineer of the Year 2000,[7] and was elected to the Risk Hall of Fame in 2002.[8] He is the author of numerous articles on quantitative finance on the topics of volatility and the nature of financial modeling.[9]

Since 1995, Derman has written many articles pointing out the essential difference between models in physics and models in finance. Good models in physics aim to predict the future accurately from the present, or to predict new previously unobserved phenomena; models in finance are used mostly to estimate the values of illiquid securities from liquid ones. Models in physics deal with objective variables; models in finance deal with subjective ones. “In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a usable theory of anything.”

Professor Derman together with Paul Wilmott wrote the Financial Modelers' Manifesto, a set of principles for doing responsible financial modeling.[10]


In 2011, Prof. Derman published a new book titled Models.Behaving.Badly: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life. In that work he decries the breakdown of capitalism as a model during the bailouts characterizing the 2008 financial crisis and calls for a return to principles, to the notion that if you want to take a chance on the upside, you have also taken a chance on the downside. More generally, he analyzes three ways of understanding the behavior of the world: models, theory and intuition. Models. he argues, are merely metaphors that compare something you would like to understand with something you already do. Models provide relative knowledge. Theories, in contrast, are attempts to understand the world on absolute terms; while models stand on someone else's legs, theories, like Newton's or Maxwell's or Spinoza's, stand on their own. Intuition, the deepest kind of knowledge, comes only occasionally, after long and hard work, and is a merging of the understander with the understood. His book elaborates on these ideas with examples from the theories of physics and philosophy, and the models of finance.

See also


External links

Источник: Emanuel Derman