The Volatility Surface: A Practitioner's Guide

by Jim Gatheral, Nassim Nicholas Taleb

Praise for The Volatility Surface"I'm thrilled by the appearance of Jim Gatheral's new book The Volatility Surface. The literature on stochastic volatility is vast, but difficult to penetrate and use. Gatheral's book, by contrast, is accessible and practical. It successfully charts a middle ground between specific examples and general models--achieving remarkable clarity without giving up sophistication, depth, or breadth."--Robert V. Kohn, Professor of Mathematics and Chair, Mathematical Finance Committee, Courant Institute of Mathematical Sciences, New York University"Concise yet comprehensive, equally attentive to both theory and phenomena, this book provides an unsurpassed account of the peculiarities of the implied volatility surface, its consequences for pricing and hedging, and the theories that struggle to explain it."--Emanuel Derman, author of My Life as a Quant"Jim Gatheral is the wiliest practitioner in the business. This very fine book is an outgrowth of the lecture notes prepared for one of the most popular classes at NYU's esteemed Courant Institute. The topics covered are at the forefront of research in mathematical finance and the author's treatment of them is simply the best available in this form."--Peter Carr, PhD, head of Quantitative Financial Research, Bloomberg LP Director of the Masters Program in Mathematical Finance, New York University"Jim Gatheral is an acknowledged master of advanced modeling for derivatives. In The Volatility Surface he reveals the secrets of dealing with the most important but most elusive of financial quantities, volatility."--Paul Wilmott, author and mathematician"As a teacher in the field of mathematical finance, I welcome Jim Gatheral's book as a significant development. Written by a Wall Street practitioner with extensive market and teaching experience, The Volatility Surface gives students access to a level of knowledge on derivatives which was not previously available. I strongly recommend it."--Marco Avellaneda, Director, Division of Mathematical Finance Courant Institute, New York University"Jim Gatheral could not have written a better book."--Bruno Dupire, winner of the 2006 Wilmott Cutting Edge Research Award Quantitative Research, Bloomberg LP

Genres: Finance, Textbooks, Reference, Mathematics

208 pages, Kindle Edition

First published January 1, 2006

Reviews

[Robert · Rating 2 out of 5]

The Volatility Surface: a Practitioner’s Guide does not come across as a practitioner’s guide. There are gems of practical wisdom, but these are hidden deep within pages of arcane mathematics which, in my opinion, should be in the appendix if they are to be included at all.

This criticism is not primarily centred on the difficulty of the mathematics: volatility is a difficult subject so I wouldn’t expect any proper treatment to be straightforward. Rather, the book is too mathematical in the sense that even when I bit the bullet and worked through some of the derivations in full (dusting off some of the Mathematical Methods lecture notes from university), they seldom gave much insight. Rather than being a “practitioner’s guide”, the book comes across as a follow-along exercise book for students taking his lecture course at NYU to pick up some mathematical tricks.

Furthermore, the organisation of the book is bizarre. Jargon is introduced without explanation; subjects are discussed without being put into context; figures and tables are inserted with little reference or commentary. I get the impression that this book was a rather hasty compilation of lectures into textbook format.

All this said, there were parts of the book that I liked: the treatment jumps and default risk were pitched at the right level of detail, with a clear emphasis on practicality. Gatheral also does make valuable points regarding the qualitative differences between stochastic volatility fits and local volatility fits, though you do have to dig through the book to find these.

Perhaps my criticisms are unfair. I presume the target audience for this book is a sell-side derivatives quant, which I certainly am not. Nevertheless, I got a lot more out of Maxime de Bellefroid’s The Derivatives Academy – it contains many of the same insights in a *much* more accessible format, though it sometimes lacks detail (and in many cases references Gatheral!).

[clamintine · Rating 4 out of 5]

I would recommend companying it with the Volatility surface YouTube playlist on quntpie’s channel

[Juraj Spilda · Rating 4 out of 5]

Well written and clear. My only complaint is about the somewhat misleading title : I was expecting discussions on how to model the volatility surface (interpolation / extrapolation / parameterization) but instead got a walkthrough of applications of (stochastic) volatility models to pricing increasingly exotic derivatives.

[May Ling]

For those that are interested in the math of the volatility within equity derivatives, this is your book. It introduces in order the various types of options, approaches to pricing them, then introduces the math behind the newer types of options.

One place where it is weak is that it really is more of a technical approach and not a conceptual approach to understanding the volatility surface. In this regard, it is more advanced, as one should probably have some working knowledge of the "feel" of options understand what the book is saying in the way of using different models and their limitations.

For the newbe, this is definitely not the book you go to first, unless you come primarily from math and engineering background trying to learn the the computer programming side of your job. You will not learn anything of the feel of this product or how you should intuit how it works.

[Philski · Rating 3 out of 5]

I skimmed it, it's a math textbook and honestly I don't care that much about the theoretical math of stock option volatility simply because the prices are what the market makers post, regardless of theory, so I skimmed it for Nassim Taleb's forward and then any bits of information I could distill from the results. It was decent if you are a major/exotic option practitioner there's a lot of useful math in here :)

[Damianbusch1 Busch · Rating 3 out of 5]

Well done book on volatility, a little heavy for practical application unless you're pricing extremely sensitive illiquid contracts.

[Shrut Patel · Rating 3 out of 5]

Extremely quantitative.