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Dynamics of Markets

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  • 19 b/w illus.
  • Page extent: 286 pages
  • Size: 247 x 174 mm
  • Weight: 0.72 kg

Hardback

 (ISBN-13: 9780521429627)

Dynamics of Markets
Cambridge University Press
9780521429627 - Dynamics of Markets - The New Financial Economics - Edited by Joseph L. McCauley
Table of Contents

Contents

Preface to the second edition
xi
1       Econophysics: why and what
1
1.1     Why econophysics?
1
1.2     Invariance principles and laws of nature
4
1.3     Humanly invented law can always be violated
5
1.4     Origins of econophysics
7
1.5     A new direction in econophysics
8
2       Neo-classical economic theory
10
2.1     Why study “optimizing behavior”?
10
2.2     Dissecting neo-classical economic theory (microeconomics)
12
2.3     The myth of equilibrium via perfect information
18
2.4     How many green jackets does a consumer want?
24
2.5     Macroeconomics
25
3       Probability and stochastic processes
29
3.1     Elementary rules of probability theory
29
3.2     Ensemble averages formed empirically
30
3.3     The characteristic function
32
3.4     Transformations of random variables
33
3.5     Laws of large numbers
34
3.6     Examples of theoretical distributions
38
3.7     Stochastic processes
43
3.8     Stochastic calculus
57
3.9     Ito processes
63
3.10    Martingales and backward-time diffusion
77
4       Introduction to financial economics
80
4.1     What does no-arbitrage mean?
80
4.2     Nonfalsifiable notions of value
82
4.3     The Gambler's Ruin
84
4.4     The Modigliani–Miller argument
85
4.5     Excess demand in uncertain markets
89
4.6     Misidentification of equilibrium in economics and finance
91
4.7     Searching for Adam Smith's Unreliable Hand
93
4.8     Martingale markets (efficient markets)
94
4.9     Stationary markets: value and inefficiency
98
4.10    Black's “equilibrium”: dreams of recurrence in the market
101
4.11    Value in real, nonstationary markets
102
4.12    Liquidity, noise traders, crashes, and fat tails
103
4.13    Long-term capital management
105
5       Introduction to portfolio selection theory
107
5.1     Introduction
107
5.2     Risk and return
107
5.3     Diversification and correlations
109
5.4     The CAPM portfolio selection strategy
113
5.5     Hedging with options
117
5.6     Stock shares as options on a firm's assets
120
5.7     The Black–Scholes model
122
5.8     The CAPM option pricing strategy
124
5.9     Backward-time diffusion: solving the Black–Scholes pde
127
5.10    Enron 2002
130
6       Scaling, pair correlations, and conditional densities
133
6.1     Hurst exponent scaling
133
6.2     Selfsimilar Ito processes
135
6.3     Long time increment correlations
139
6.4     The minimal description of dynamics
145
6.5     Scaling of correlations and conditional probabilities?
145
7       Statistical ensembles: deducing dynamics from time series
148
7.1     Detrending economic variables
148
7.2     Ensemble averages constructed from time series
149
7.3     Time series analysis
152
7.4     Deducing dynamics from time series
162
7.5     Early evidence for variable diffusion models
167
7.6     Volatility measures
167
7.7     Spurious stylized facts
168
7.8     An sde for increments?
173
7.9     Topological inequivalence of stationary and nonstationary processes
173
8       Martingale option pricing
176
8.1     Introduction
176
8.2     Fair option pricing
178
8.3     Pricing options approximately via the exponential density
182
8.4     Option pricing with fat tails
185
8.5     Portfolio insurance and the 1987 crash
186
8.6     Collateralized mortgage obligations
186
9       FX market globalization: evolution of the Dollar to worldwide reserve currency
188
9.1     Introduction
188
9.2     The money supply and nonconservation of money
189
9.3     The gold standard
190
9.4     How FX market stability worked on the gold standard
190
9.5     FX markets from WWI to WWII
194
9.6     The era of “adjustable pegged” FX rates
196
9.7     Emergence of deregulation
197
9.8     Deficits, the money supply, and inflation
204
9.9     Derivatives and shadow banking
208
9.10    Theory of value under instability
211
9.11    How may regulations change the market?
212
10      Macroeconomics and econometrics: regression models vs empirically based modeling
214
10.1    Introduction
214
10.2    Muth's rational expectations
216
10.3    Rational expectations in stationary markets
219
10.4    Toy models of monetary policy
222
10.5    The monetarist argument against government intervention
224
10.6    Rational expectations in a nonstationary world
225
10.7    Integration I(d) and cointegration
226
10.8    ARCH and GARCH models of volatility
238
11      Complexity
241
11.1    Reductionism and holism
241
11.2    What does “complex” mean?
244
11.3    Replication, mutations, and reliability
253
11.4    Emergence and self-organization
256
References
261
Index
268



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