The Statistical Mechanics of Financial Markets

"Provides an excellent introduction for physicists interested in the statistical properties of financial markets... basic financial terms such as shorts, limit orders, puts, calls, and other terms are clearly defined... an excellent starting point for the interested physicist." PHYSICS TODAY
This introductory treatment describes parallels between statistical physics and finance, both long established and new research results on capital markets. Forming the core of Voit's treatment are the concepts of random walks, scaling of data, and risk control. Voit discusses the underlying assumptions using empirical financial data and analogies to physical models such as fluid flows and turbulence. He formulates theories of derivative pricing and risk control, and shows how computer simulations of markets provide insights into price fluctuations and how crashes are modelled in ways analogous to phase transitions. This corrected edition has been updated with several new and significant developments, e.g. the dynamics of volatility smiles and implied volatility surfaces, path integral approaches to option pricing, a new simulation scheme for options, multifractals, the application of nonextensive statistical mechanics to financial markets, and the minority game.

From the reviews:

"Apart from its envisioned audience in the physics community this book should be useful to econometricians and statisticians who are interested in an unconventional look at empirical finance. It is excellent at illustrating the similarities of financial markets with non-equilibrium physical systems, notably turbulence. Although it is too early for a final verdict on the merits of ‘physics methods’ in finance, this book is a most welcome starting point for anybody interested in this new interdisciplinary area." (Statistical Papers, 44/2, 2003)

"Provides an excellent introduction for physicists interested in the statistical properties of financial markets. Appropriately early in the book, the basic financial terms such as shorts, limit orders, puts, calls, and other terms are clearly defined. Examples, often with graphs, augment the reader's understanding of what may be a plethora of new terms and ideas. [...] In conclusion, The Statistical Mechanics of Financial Markets is an excellent starting point for the physicist interested in the subject. Some of the book’s strongest features are its careful definitions, its detailed examples, and the connections it establishes to physical systems. The mathematics are the level of upper undergraduate statistics and statistical physics, making the book suitable for students as well as practicing physicists." (PHYSICS TODAY)

"An interesting book that blends textbook explanation with well-established concepts in finance and physics with a review of more recent ideas […] On the whole the book is well balanced between the new and the old, truth and hope, lore and lure. It has some significant overlaps with books such as Mantegna and Stanley’s An Introduction to Econophysics and the book I coauthored with Potters, Theory of Financial Risks; however, it is broader in scope and contains a lot more physics and speculative ideas. Theuseful references and Web links provided at the end of the book might make it an easier step to climb for physicists who want to know where the action is." (Jean-Philippe Bouchaud, AMERICAN SCIENTIST, 90/3, 2002)

"Reading this book is a good way for physicists and those with like training to become acquainted with research problems in finance, and it gives finance people with more conventional backgrounds the chance to see what has been accomplished by the physicists who have worked in this area." (Mathematical Reviews 2002a)

"This book is excellent at illustrating the similarities of financial markets with other non-equilibrium physical systems. [...] In summary, a very good book that offers more than just qualitative comparisons of physics and finance." (www.quantnotes.com)

From the reviews of the second edition:

"The purpose of the present book is to express … connections between econometrics and physics. … the book covers a broad variety of topics concerning financial market research and its link to physics. … Many figures as well as the interspersed examples illustrate well the presented facts … . The appendix ... offers valuable hints regarding opportunities to improve one’s knowledge starting from this book. ... It is a valuable tool for ... interested researchers in the field of financial markets." (Olaf Schoffer, Statistical Papers, Vol. 46 (2), 2005)