Reading List

 

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I use this page to list the relevant books and periodicals. (Research papers and Internet resources are listed in Resources.)

I promise that I will never list a book that I haven't read myself. If you can recommend a good book, I will probably list it here (and mention you in acknowledgements), but I will list it only after I have read it.

The order in which I list the books is important. I list them in the order of (1) increasing specialisation, (2) increasing difficulty, then (3) decreasing relevance/significance. Thus you should know when to stop reading the list (it may no longer be relevant to your interests and tasks at hand after a certain point).

If you hover over a particular link, you will see a description of the item and a quote from Amazon.

Contents

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Background

This popular book will be of great interest to all practicing and aspiring quants.

By the time Emanuel Derman joined Goldman Sachs as a quant, he was an accomplished theoretical particle physicist, having worked and studied at the University of Cape Town, Columbia, Pennsylvania, Oxford, Rockefeller and the University of Colorado at Boulder. He also worked as a software developer at AT&T. His groundbreaking achievements in finance include the Black-Derman-Toy interest-rate model and his pioneering work on local volatility models and the volatility smile.

This book compares the worlds of science and finance. It is well-written, highly entertaining, and full of practical knowledge. Among other things, it describes what it's like to be a quant and how a quant thinks.

This is a short article by Mark Joshi, formerly Head of QuaRC at the Royal Bank of Scotland. I would recommend it to all aspiring quants. What does a quant do? What sorts of quant are there? What does a quant need to know? This article addresses these and many other practical questions.

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Finance

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Fundamentals

If you are new to finance, these books will give you a general idea of the subject. It may be useful to browse through them before you progress to the more technical ones.

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Derivatives

Hull is considered by many to be the "Bible" of mathematical finance. If you were to read a single book on the subject, this would be the one. It covers, among other things, the mechanics of futures and options markets; hedging strategies; swaps; interest rates; trading strategies; numerical procedures; binomial trees; Wiener processes and Itô's lemma; the Black-Scholes-Merton model; the Greek letters; volatility smiles; basic numerical procedures; VaR; credit risk; credit derivatives; exotic options; weather, energy, and insurance derivatives; martingales and measures; interest rate derivatives. The book is fairly balanced, offering both mathematical rigour and business knowledge. The numerous "business snapshots" are particularly entertaining.

The exercises in Hull's texts are straighforward and well worth attempting. You can use this solutions manual to check your answers.

As the authors put in the Preface, "notoriously, works of mathematical finance can be precise, and they can be comprehensible. Sadly, as Dr. Johnson might have put it, the ones which are precise are not necessarily comprehensible, and those comprehensible are not necessarily precise. But both are needed."

This book is both precise and comprehensible, if perhaps somewhat theoretical. Moreover, it's only about 200 pages long. The emphasis is on the martingale approach. The book proceeds from discrete (Chapter 2) to continuous processes (Chapter 3), to introduce the methods of pricing market securities (Chapter 4). It then looks at the interest rates (Chapter 5) and some bigger models (Chapter 6). There are few exercises. Appendix 3 contains detailed answers to all of them.

  • Steven E. Shreve. Stochastic Calculus for Finance I: The Binomial Asset Pricing Model. Springer Finance. Springer Science + Business Media, 2005.
  • Steven E. Shreve. Stochastic Calculus for Finance II: Continuous-Time Models. Springer Finance. Springer Science + Business Media, 2004.
    • Abstract
    Stochastic Calculus for Finance evolved from the first ten years of the Carnegie Mellon Professional Master's program in Computational Finance. The content of this book has been used successfully with students whose mathematics background consists of calculus and calculus-based probability. The text gives both precise statements of results, plausibility arguments, and even some proofs, but more importantly intuitive explanations developed and refined through classroom experience with this material provided. The book includes a self-contained treatment of the probability theory needed for stochastic calculus, including Brownian motion and its properties. Advanced topics include foreign exchange models, forward measures, and jump-diffusion processes.
    This book is being published in two volumes. The first volume presents the binomial asset pricing model primarily as a vehicle for introducing in a simple setting the concepts needed for the continuous-time theory in the second volume.
    Chapter summaries and detailed illustrations are included. Classroom-tested exercises conclude every chapter. Some of these extend the theory, and others are drawn from practical problems in quantitative finance.
    Advanced undergraduates and Master's-level students in mathematical finance and financial engineering will find this book useful.
    Steven E. Shreve is Co-Founder of the Carnegie Mellon MS Program in Computational Finance and winner of the Carnegie Mellon Doherty Prize for sustained contributions to education.
    • Review by Peter Carr (Head of Quantitative Research, Bloomberg LP, and Director of the NYU Master's Program in Mathematical Finance)
    Steve Shreve is well known in the quant community as an extraordinary researcher and a brilliant communicator. I have often referred to his infamous lecture notes as the definitive treatment on derivative security pricing and hedging. I am delighted that these notes have now graduated like so many of his students. Providing a review on the resulting book is a little like being asked to critique the Bible. It suffices to say that I think this is the first book that anyone should read as an entrée into this fascinating field.
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High-Frequency Finance

  • Michael M. Dacorogna, Ramazan Gençay, Ulrich Müller, Richard B. Olsen, Olivier V. Pictet. An Introduction to High-Frequency Finance. Academic Press, 2001.
    • Abstract
    An Introduction to High-Frequency Finance is the first and only source of unified information about high-frequency data. It provides a framework for the analysis, modeling, and inference of high-frequency financial time series. With particular emphasis on foreign exchange markets, as well as currency, interest rate, and bond futures markets, this unified view of high-frequency time series methods investigates the price formation process and concludes by reviewing techniques for constructing systematic trading models for financial assets.
    • Review by Benoit B. Mandelbrot (Sterling Professor of Mathematical Sciences, Yale University)
    At long last, the study of financial prices is moving beyond convenient oversimplifications. For providing much of the best data and an indispensable bridge between the financial and academic communities, this flowering is deeply indebted to the group led by Dr. Richard Olsen.
    This group and its alumni have also analyzed their own data. That work, which I often quote, has now been collected and extended in a book. I shall wear it out by constant use and it is a delight to recommend it to the emerging rational finance community.
  • Ramazan Gençay, Faruk Selçuk, Brandon Whitcher. An Introduction to Wavelets and Other Filtering Methods in Finance and Economics. Academic Press, 2002.
    • Abstract
    What can wavelet analysis tell us about time series? Filled with empirical applications from economics and finance, this book presents a unified view of filtering techniques. It provides easy access to a wide spectrum of parametric and nonparametric filtering methods, moving from older, well-known methods to newer ones, including neural networks. Avoiding proofs as much as possible and emphasizing explanations and underlying theories, the authors ensure that both those who are familiar with wavelets and those who ought to be have a definitive book that reveals the capabilities, advantages, and disadvantages of each method.
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Foreign Exchange

  • S. Shamah. A Foreign Exchange Primer. Wiley Finance. John Wiley & Sons, 2003.
    • Abstract
    The foreign exchange market is the largest market in the world, with an esitmated $1.6 trillion average daily turnover. This book sets out to introduce the novice to the practical skills necessary to understand the foreign exchange market today. Foreign Exchange Primer provides a clear understanding of how this market functions, from the main products through to the techniques used, coverage of the main participants, details of the various "players" and an understanding of the "jargon" used in everyday dealings. This concise and highly accessible primer is ideal for anyone new to or wanting to become involved in the foreign exchange market, from a dealing room or sales perspective through to the novice investor.

This book, published in 1998, is a comprehensive collection of empirical studies on currency options and their implications on issues of exchange rate economics, such as exchange risk premiums, volatility, market expectations and credibility of exchange rate regimes. It contains presentations of some of the original classic works. It opens with a relatively gentle introduction to option pricing theory, an introduction to currency options markets, then proceeds to consider their applications in Part II. One may wish to read Hull's book first to get a clearer idea of the fundamental concepts.

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Risk

This book has been around for quite a few years. The author changed its title several times to reflect the changing perspectives on VaR. (The previous edition was subtitled "...The New Benchmark for Managing Financial Risk".) It covers the mathematics of VaR, but the emphasis is on the business (very much in the style of Hull's "business snapshots"), providing the motivation for risk management. This book has become a bible of VaR.

Holton's book is more recent than Jorion's. It is more expensive (currently 58.90 pounds on Amazon - 2007-06-11). Holton focusses on the maths. The book is written in a style similar to Salih Neftci's, covering the fundamental mathematics behinds VaR (including calculus, some basic probability theory, etc.) and then (towards the second half of the book!) goes into practical details.

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Economics

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Periodicals

Although quants are naturally concerned with quantitative finance, they are generally expected to be aware of the various macroeconomic factors. To stay up-to-date, read

  • The Economist, either its online version (you have to subscribe to access most of the articles), or the paper version available from most newsagents.
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Mathematics

Some areas of mathematics are heavily used in finance, e.g. probability theory, stochastic calculus, and partial differential equations. Here I list some books that I personally find useful.

Mathematics is not a spectator sport, and practice is just as important as theory (if not more important). In general, where available, I use the Schaum's Outlines to excercise my undergraduate mathematics. Not all of these books are equally good, but some are excellent.

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Calculus

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Probability, Statistics, and Random Processes

  • D. Ruppert. Statistics and Finance: An Introduction (Springer Texts in Statistics). Springer Texts in Statistics. Springer, 2004.
    • Abstract
    This textbook emphasises the applications of statistics and probability to finance. Students are assumed to have had a prior course in statistics, but no background in finance or economics. The basics of probability and statistics are reviewed and more advanced topics in statistics, such as regression, ARMA and GARCH models, the bootstrap, and nonparametric regression using splines, are introduced as needed. The book covers the classical methods of finance such as portfolio theory, CAPM, and the Black-Scholes formula, and it introduces the somewhat newer area of behavioural finance. Applications and use of MATLAB and SAS software are stressed. The book will serve as a text in courses aimed at advanced undergraduates and masters students in statistics, engineering, and applied mathematics as well as quantitatively oriented MBA students. Those in the finance industry wishing to know more statistics could also use it for self-study.

A very readable introduction to stochastic calculus.

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Numerical Analysis

The following is a reference, not a textbook:

This is a bible of scientific computing. The Numerical Recipes cover linear algebra, interpolation, special functions, random numbers, nonlinear sets of equations, optimisation, eigensystems, Fourier methods and wavelets, statistical tests, ODEs and PDEs, integral equations and inverse theory. They cover the theory, outline the algorithms, and provide their implementations in C++.

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Programming

Quants spend much (most?) of their time writing code, so programming is an extremely important activity. In fact, it is so important that some of them have written songs about it! Unfortunately, while many people can program, few can program well. It is the latter that counts. The purpose of the following books is to teach one to be a good programmer.

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Software Engineering

Known in the trade as the "Gang of Four" book, this is arguably one of the most useful texts in software engineering. A design pattern is a general repeatable solution to a commonly occurring problem in software design. Usually it is a description or template that can be applied in many different situations. This book catalogues and documents the 23 classic design patterns that most software engineers will be aware of.

Written by a senior quant (who also wrote The Concepts and Practice of Mathematical Finance), this concise text demonstrates how a subset of the classic 23 design patterns can be used to build a simple but complete exotics pricing engine. In particular, it explains the Factory Method, Abstract Factory, Singleton, Monostate, Adapter, Bridge, Decorator, Strategy, Template, and Iterator. It also goes through a number of general object-oriented programming issues (code reuse, encapsulation, etc.) and C++ programming techniques, such as functors, virtual constructors, virtual copy constructors, wrapper classes, and templates. These concepts are used to apply Monte Carlo, pricing on a binary tree, random number generators (including anti-thetic sampling), Newton-Raphson solvers, etc. However, the emphasis is on programming, not mathematics. This book will be particularly useful to mathematicians seeking to improve their programming skills, not the other way around.

A classic book by Arthur J. Riel discusses the good practices of software engineering in the form of easy to learn heuristics, demonstrates them by means of examples, and introduces much of the useful terminology.

I often use UML in my work, but I never use more than a small subset. This book by Martin Fowler goes beyond that subset. Yet it does present a very pragmatic, user-friendly view of UML.

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C++

This is a thorough review of the C++ programming language written by its creator.

Scott Meyers' books are superb. They distil the practical programming knowledge that would take many years to acquire under normal conditions. Between knowing the grammar of a programming language and being able to use it fluently there is an abyss. These books have improved my fluency in C++.

Scott Meyers: "This could well be the first book ever written for people who are already familiar with C++ - all of C++. From language features to components of the standard library to programming techniques, this book skips from topic to topic, always keeping you slightly off balance, always making sure you're paying attention. Just like real C++ programs." Written in a pragmatic problem/solution style, this book does a great job at teaching the subtleties of C++. It emphasises exception safety (hence the name).

  • A. Alexandrescu. Modern C++ Design: Applied Generic and Design Patterns (C++ in Depth). C++ In-Depth Series. Addison-Wesley, 2001.
    • Abstract
    Busy programmers are offered exciting and powerful new C++ idioms with surprising capabilities that are described in this book. Beginning with detailed descriptions of techniques used in generic programming, the text builds on that foundation and implements a number of industrial strength components used in real-world applications.

An extremely useful book that demonstrates how to combine inheritance, templates, and design patterns. According to Herb Sutter, "Modern C++ Design is an important book. Fundamentally, it demonstrates "generic patterns" or "pattern templates" as a powerful new way of creating extensible designs in C++ — a new way to combine templates and patterns that you may never have dreamt was possible, but is. If your work involves C++ design and coding, you should read this book. Highly recommended..." Enough said.

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Apologetics

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C#

If you are a Java programmer seeking to learn C# quickly and relatively painlessly, this book is for you.

STOP PRESS! The next book in this series, More Effective C#: Specific Ways to Improve Your C# 2.0 is available for pre-order for 31 March 2008 (to be confirmed).

Yet another Effective... book, following Scott Meyers' lead (see Effective C++ and Effective Java above). I am still reading it. So far it looks good.

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Java

As the title suggests, this is the official specification of the Java programming language. Although it's hardly the best text for learning Java, it is an indispensable reference.

I would recommend this book to every Java programmer. It follows the pattern of Scott Meyers' Effective... series, distilling the practical wisdom of the programming process.

STOP PRESS! The second edition of this excellent book is now available. The book has been expanded significantly. In addition it now covers Java 6.

Doug Lea is a professor of computer science at State Unviersity of New York at Oswego where he specialises in concurrent programming. He is on the Executive Committee of the Java Community Process and chaired JSR 166, which added concurrency utilities to Java. This is his definitive text on concurrent programming in Java.

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MATLAB

MATLAB is a numerical computing environment and programming language. It is extremely popular among quants. Note that MATLAB is an acronym for "matrix laboratory", not "mathematical laboratory".

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VBA and Excel

This is an excellent book on VBA, although it is not exactly introductory. What's the best way to learn VBA from scratch? I wouldn't be able to recommend a book as I learned it by doing and consulting various resources on the Web.

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