Ali’s blog

Mostly quant stuff with occasional digressions

Book for 5092

Posted by alifinmath on February 13, 2008

I think Chris is intending to talk about “pairs trading” at some time. There appears to be a dearth of good literature on the subject, and indeed on automated trading generally (probably because every group involved in developing such systems wants to keep its designs and methods secret). One good book I have found is Applied Quantitative Methods for Trading and Investment, edited by Dunis, Laws, and Naim, and published by Wiley. This is not an easy book: it’s chockful of hard content. It’s a must-have for anyone involved in computational finance and automated trading. Other than the Amazon reviews, this is the review from “Bachelier”:

“This round-up book with chapters by experts begins where Benninga leaves off and is an order of magnitude more difficult. Nevertheless, it is the single best “one stop” book on the next stage of quantitative finance I’ve come across. If you made it through Joshi and had no problem, and you make it through this then you should consider yourself in conversation with professionals.”

I think this assessment is correct. (“Benninga” refers to “Financial Modeling,” by Simon Benninga, which is another must-have.)

Chapter 2 deals with cointegration (a generalisation of pairs trading): 30 pages, along with spreadsheets and graphs on the accompanying CD. Chapter 5 with implementing neural networks. Chapter 8 with stochastic volatility models. Chapter 9 with portfolio analysis using Excel. And Chapter 10 with volatility and correlation modeling using Excel.

I’ll be returning my own borrowed copy to the Wilson Library (U of M) today or tomorrow, as my own copy has arrived. For some inexplicable reason, no new copies are on the market, although this 2003 book was reprinted in 2005 and 2007.


5 Responses to “Book for 5092”

  1. foquant said

    I have debated about getting this book for a while and its on my wishlist. Glad to you see you like it. And, if Bachelier says its good, it has to be.

    Specific to pairs trading, I came into a copy of the book by Ganapathy Vidyamurthy, which provides a decent overview.

  2. alifinmath said

    “Bachelier” also recommended the Benninga book, which is now on its way to me. Among many other things, it has Excel exercises and calculations for the Black-Litterman model: something difficult to find.

    While I’m on the subject of high-class books for practitioners, another recent acquisition on my part is Jan Dash’s 800-page monograph, “Quantitative Finance and Risk Management,” published by World Scientific. And I’m (still) waiting for the arrival of Fusai and Roncoroni’s “Implementing Models in Quantitative Finance.” And then — *sigh* — all I have to do is find the time and energy to work through these books. As it says in the Bible (King James version): “And further, by these, my son, be admonished: of making many books there is no end; and much study is a weariness of the flesh.” (Ecclesiastes 12:12)

    Postscript: I’m aware of the Vidyamurthy book but (until now) wasn’t aware whether it was any good.

  3. foquant said

    One of my favorite quotes:

    The way a young man spends his evenings is a part of that thin area between success and failure. Robert R. Young

    Any thoughts you’d care to share on Dash’s book? Even initial impressions?

  4. alifinmath said

    Initial impressions: It’s for finance professionals, preferably with Ph.D.s in physics or applied math (the kind who won’t swoon when Green’s functions are mentioned, for example). It’s somewhere between a high-level survey and a monograph; Dash does, however, give references to the literature when required. A quant would need it on his shelf in the same manner he would need “Numerical Recipes” by Press et al. Let me get back to you on the contents of the book: I don’t have access to the book as I’m presently not at home.

  5. alifinmath said

    I’ve written a little review for the book at the sister blog, “Quant Book Reviews” (

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