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Copula Methods in Finance [Hardcover]

Umberto Cherubini , Elisa Luciano , Walter Vecchiato

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Book Description

July 2 2004 0470863447 978-0470863442 1
Copula Methods in Finance is the first book to address the mathematics of copula functions illustrated with finance applications.  It explains copulas by means of applications to major topics in derivative pricing and credit risk analysis.  Examples include pricing of the main exotic derivatives (barrier, basket, rainbow options) as well as risk management issues.  Particular focus is given to the pricing of asset-backed securities and basket credit derivative products and the evaluation of counterparty risk in derivative transactions.

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Review

"...This book is of great use for researchers as well as practitioners..." (Statistical Papers, July 2005)

From the Back Cover

The evaluation and risk measurement of portfolios of complex non-linear positions and non-normal risk factors has become a major nightmare for people working in the structured finance business. Dealing with "fat tails" and "smile effects", as well as the typical asymmetric shape of default risk has rapidly made obsolete the traditional linear correlation tools. In this new environment, the copula functions methodology has become the most significant new technique to handle the co-movement between markets and risk factors in a flexible way. This is the first book addressing copula functions from the viewpoint of mathematical finance applications. The method is to explain copulas by means of applications to major topics in derivative pricing and credit risk analysis, with the target to make the reader able to device her own application, following the strategies illustrated throughout the book. Examples include pricing of the main exotic derivatives typically included in commonly traded structured finance products (barrier, basket, rainbow options), as well as risk management issues. Particular focus is given to the pricing of asset-backed securities and basket credit derivative products and the evaluation of counterparty risk in derivative transactions.

Copula Methods in Finance provides:

  • Rigorous treatment of the mathematics of copula functions, illustrated with financial applications
  • Complete analysis of estimation and simulation issues applied to market data
  • Credit-linked structured products applications: CDO and basket credit derivatives
  • Equity-linked structured product applications: barrier, rainbow and basket derivatives
  • Counterparty risk in derivative transactions: vulnerable option pricing

Inside This Book (Learn More)
First Sentence
Here we give a brief description of the basic pillar behind pricing techniques, that is the use of risk-neutral probability measures to evaluate contingent claims, versus the objective measure observed from the time series of market data. Read the first page
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Front Cover | Copyright | Table of Contents | Excerpt | Index | Back Cover
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Amazon.com: 2.7 out of 5 stars  3 reviews
18 of 19 people found the following review helpful
2.0 out of 5 stars Comprehensive but full of mistakes Feb. 7 2006
By Galileo Galilei - Published on Amazon.com
Format:Hardcover
This book promises to be a very good comprehensive introduction to copula theory and addresses many practical aspects of copula. There are useful sections on bivariate (2-dimensional) and mulit-variate copulas including elliptical (Normal, Student t) and archimedian copula. There is a fair section on fitting copula parameters to data and a good section on Monte Carlo simulation of fitted copula.

However, there are numerous errors that I've come across, which make learning from this book very difficult or impossible. In fact, every section I've looked at in detail has mistakes, not typos, in the equations. (I just dropped my rating to 2 stars because of this!) The multivariate Frechet minimum boundary is written incorrectly in multiple locations. Whereas an example demonstrates that this bound is not a true copula, the following theorem says that it is a copula. The reference for the theorem, Sklar (1999), actually reads "Personal communication" in the bibliography! This reference is only slightly better than "From a dream..."

Unfortunate notation confuses the reader by repeating the copula density notation for the "conditional distribution" in the simulation section. This section is also riddled with mistakes and unexplained notation. Thankfully, enough examples exist that some use can be make of portions of the text by the practitioner.
18 of 20 people found the following review helpful
4.0 out of 5 stars The most readable and July 21 2004
By Surf/Bike - Published on Amazon.com
Format:Hardcover
This is the kind of book I wished to have when I started to study copula functions in finance. The book does not bring big innovations in the subject, but has an exception value in its attempt to collect and make accessible lot of material on copulae. Equity and Credit Risk are the primary fields of application. After introducing bivariate families of copulae and different measures of association, it extends the analysis to the multidimensional case. Then two very nice chapters deal with the problem of 1) calibrating copulae 2) sampling from various copulae. Finally, applications to credit risk (CDOs) and equity options are presented. Overall, I think it is a very valuable book for all the people looking to have one unique source to understand and apply copula functions in finance.
4 of 9 people found the following review helpful
2.0 out of 5 stars Not a good introductory book April 13 2006
By xinonnet - Published on Amazon.com
Format:Hardcover
This book is difficult to follow, although the examples helps to clarify some of the concepts. While it might be a good reference, it is not a good introductory book for someone who didn't have any prior knowledge on copulas.

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