The Volatility Surface – A Practitioner’s Guide by Jim Gatheral

The Volatility Surface GatheralMuch of my life as a so-called financial analyst has focused on understanding the abstract concept of the volatility surface. I’ve read highly-academic texts that emphasize mathematical formality, but as a wannabe-quant, I need something that’s a little more practical. Perhaps a text targeted at practitioners…

Well, a colleague recommended Gatheral’s “The Volatility Surface : A Practitioner’s Guide”.  The subtitle was enough to pique my interest.

Moreover, a fellow quant-in-training had taken a class given by Gatheral at Baruch College and was impressed by the clarity of his teaching.

Feeling more confident about this book, I dutifully purchased a copy and started plowing through the material.

The first thing I noticed was that much of the book references literature and journal papers written since 2000 and beyond. It was certainly apparent that Gatheral addresses the most recent developments in modeling the volatility surface.

Also, this book is aimed at those working in real-world equity derivatives. Gatheral draws on his 17 years’ running a trading desk at Merryl Lynch, and often describes how traders and quants interact with dealers and salespeople in a competitive marketplace.

I feel that a warning to prospective readers is merited – Gatheral doesn’t shy away from the math.  For a true appreciation of the subject matter, you’ll need to be au fait with stochastic math, differential equations, numerical methods, option pricing and more.

But don’t let me scare you too much. The math is expertly explained, and there’s nothing that’s beyond the scope of a student with a masters in finance. Not all the proofs are formal; clarity is favored over mathematical formality.

I found the final chapter of most value, purely due to my research interests; a remarkably clear foray into variance swaps and options on volatility. Over the last fifteen years, this market has flourished into an important sector. 

Overall, I would recommend this book to students of this fascinating subject.

You can buy The Volatility Surface – A Practitioner’s Guide at Amazon by clicking on the picture on the top-left of this post, or by clicking here(these are referral links, but this has not influenced this review).


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