Any financial asset that is openly traded has a market price. Except for extreme market conditions, market price may be more or less than a “fair” value. Fair value is likely to be some complicated function of the current intrinsic value of tangible or intangible assets underlying the claim and our assessment of the characteristics of the underlying assets with respect to the expected rate of growth, future dividends, volatility, and other relevant market factors. Some of these factors that affect the price can be measured at the time of a transaction with reasonably high accuracy. Most factors, however, relate to expectations about the future and to subjective issues, such as current management, corporate policies and market environment, that could affect the future financial performance of the underlying assets. Models are thus needed to describe the stochastic factors and environment, and their implementations inevitably require computational finance tools.
Springer Handbooks of Computational Statistics Series Editors James E. Gentle Wolfgang K. H¨ardle Yuichi Mori
For further volumes: http://www.springer.com/series/7286
•
Jin-Chuan Duan James E. Gentle
Wolfgang Karl H¨ardle
Editors
Handbook of Computational Finance
123
Editors Jin-Chuan Duan National University of Singapore Risk Management Institute 21 Heng Mui Keng Terrace, Level 4 119613 Singapore Singapore
[email protected]
Prof. James E. Gentle George Mason University Department of Computational and Data Sciences University Drive 4400 22030 Fairfax Virginia USA
[email protected]
Prof.Dr. Wolfgang Karl H¨ardle Ladislaus von Bortkiewicz Chair of Statistics C.A.S.E. Centre for Applied Statistics and Economics School of Business and Economics Humboldt-Universit¨at zu Berlin Unter den Linden 6 10099 Berlin Germany
[email protected]
ISBN 978-3-642-17253-3 e-ISBN 978-3-642-17254-0 DOI 10.1007/978-3-642-17254-0 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011937712 c Springer-Verlag Berlin Heidelberg 2012 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)
Contents
Part I 1
Introduction
Computational Finance: An Introduction . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . Jin-Chuan Duan, James E. Gentle, and Wolfgang Karl H¨ardle
Part II
3
Asset Pricing Models
2
Modeling Asset Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . .