ENCYCLOPEDIA

OF

FINANCIAL MODELS
Volume II

FRANK J. FABOZZI, EDITOR

WILEY
John Wiley & Sons, Inc.

Contents

Contributors
Preface
Guide to the Encyclopedia of
Financial Models
Index

XI

xvii
xxxiii
757

Volume I
Asset Allocation

Mean-Variance Model for Portfolio Selection

Principles of Optimization for Portfolio
Selection
Asset Allocation and Portfolio Construction
Techniques in Designing the
Performance-Seeking Portfolio

Asset Pricing Models

General Principles of Asset Pricing
Capital Asset Pricing Models
Modeling Asset Price Dynamics
Arbitrage Pricing: Finite-State Models
Arbitrage Pricing: Continuous-State,
Continuous-Time Models

21

35

47
49
65
79
99
121

Bayesian Analysis and Financial

Modeling Applications
137
Basic Principles of Bayesian Analysis
Introduction to Bayesian Inference
Bayesian Linear Regression Model
Bayesian Estimation of ARCH-Type Volatility
Models
Bayesian Techniques and the Black-Litterman
Model

139
151
163
175
189

Bond Valuation
Basics of Bond Valuation
Relative Value Analysis of Fixed-Income
Products
Yield Curves and Valuation Lattices
Using the Lattice Model to Value Bonds with
Embedded Options, Floaters, Option, and
Caps/Floors

Understanding the Building Blocks for OAS

Models
Quantitative Models to Value Convertible
Bonds
Quantitative Approaches to Inflation-Indexed
Bonds

Credit Risk Modeling

An Introduction to Credit Risk Models
Default Correlation in Intensity Models for
Credit Risk Modeling
Structural Models in Credit Risk Modeling
Modeling Portfolio Credit Risk
Simulating the Credit Loss Distribution
Managing Credit Spread Risk Using Duration
Times Spread (DTS)
Credit Spread Decomposition
Credit Derivatives and Hedging Credit Risk

Derivatives Valuation
No-Arbitrage Price Relations for Forwards,
Futures, and Swaps
No-Arbitrage Price Relations for Options
Introduction to Contingent Claims Analysis
Black-Scholes Option Pricing Model

207
209
225
235

243
257
271
277

297
299
313
341
361
377
391
401
407

421
423
437
457
465

vn

viii

Pricing of Futures/Forwards and Options

Pricing Options on Interest Rate Instruments
Basics of Currency Option Pricing Models
Credit Default Swap Valuation
Valuation of Fixed Income Total Return Swaps
Pricing of Variance, Volatility, Covariance,
and Correlation Swaps
Modeling, Pricing, and Risk Management of
Assets and Derivatives in Energy and
Shipping
-

Contents

477
489
507
525
541
545

555

Volume II
Equity Models and Valuation

Dividend Discount Models

Discounted Cash Flow Methods for Equity
Valuation
Relative Valuation Methods for Equity
Analysis
Equity Analysis in a Complex Market
Equity Portfolio Selection Models in Practice
Basics of Quantitative Equity Investing
Quantitative Equity Portfolio Management
Forecasting Stock Returns

Factor Models for Portfolio

Construction
Factor Models
Principal Components Analysis and Factor
Analysis
Multifactor Equity Risk Models and Their
Applications
Factor-Based Equity Portfolio Construction
and Analysis
\
Cross-Sectional Factor-Based Models and
Trading Strategies
The Fundamentals of Fundamental Factor
Models
Multifactor Equity Risk Models and Their
Applications
Multifactor Fixed Income Risk Models and
Their Applications

Financial Econometrics
Scope and Methods of Financial Econometrics
Regression Analysis: Theory and Estimation
Categorical and Dummy Variables in
Regression Models
Quantile Regression
ARCH /GARCH Models in Applied Financial
Econometrics

15

Classification and Regression Trees and Their

Use in Financial Modeling
Applying Cointegration to Problems in
Finance
Nonlinearity and Nonlinear Econometric
Models in Finance
Robust Estimates of Betas and Correlations
Working with High-Frequency Data

Financial Modeling Principles

Milestones in Financial Modeling
From Art to Financial Modeling
Basic Data Description for Financial Modeling
and Analysis
Time Series Concepts, Representations,
and Models
Extracting Risk-Neutral Density Information
from Options Market Prices

33
47
61
89
107
121

Financial Statement Analysis

135

Important Functions and Their Features

Time Value of Money
Fundamentals of Matrix Algebra
Difference Equations
Differential Equations
Partial Differential Equations in Finance

137
153
171

Financial Statements
Financial Ratio Analysis
Cash-Flow Analysis

213
243

383
401
437
449

465
467
479
485
501
521

529
531
545
565

Finite Mathematics for Financial

Modeling
579

Model Risk and Selection

195

375

Model Risk
Model Selection and Its Pitfalls
Managing the Model Risk with the Methods
of the Probabilistic Decision Theory
Fat-Tailed Models for Risk Estimation

581
595
621,
629
643
659

689
691
699
719
731

255
267

293
295
305
333
353
359

Volume III
Mortgage-Backed Securities
Analysis and Valuation
Valuing Mortgage-Backed and Asset-Backed
Securities
The Active-Passive Decomposition Model
for MBS
Analysis of Nonagency Mortgage-Backed
Securities

1
3
17
29

CONTENTS

Measurements of Prepayments for

Residential Mortgage-Backed Securities
Prepayments and Factors Influencing the
Return of Principal for Residential
Mortgage-Backed Securities

47

65

Operational Risk

79

Operational Risk
Operational Risk Models
Modeling Operational Loss Distributions

81
91
103

Optimization Tools
Introduction to Stochastic Programming and
Its Applications to Finance
Robust Portfolio Optimization

Probability Theory
Concepts of Probability Theory
Discrete Probability Distributions
Continuous Probability Distributions
Continuous Probability Distributions with
Appealing Statistical Properties
Continuous Probability Distributions Dealing
with Extreme Events
Stable and Tempered Stable Distributions
Fat Tails, Scaling, and Stable Laws
Copulas
Applications of Order Statistics to Risk
Management Problems

Risk Measures
Measuring Interest Rate Risk: Effective
Duration and Convexity
Yield Curve Risk Measures
Value-at-Risk
Average Value-at-Risk
Risk Measures and Portfolio Selection

121
123
137

149
151
165
195
207
227
241
259
283
289

297
299
307
319
331
349

Back-Testing Market Risk Models

Estimating Liquidity Risks
Estimate of Downside Risk with Fat-Tailed
and Skewed Models
Moving Average Models for Volatility and
Correlation, and Covariance Matrices

IX

361
371
381
395

Software for Financial Modeling 415

Introduction to Financial Model Building
with MATLAB
Introduction to Visual Basic for Applications

417
449

Stochastic Processes and Tools

469

Stochastic Integrals
Stochastic Differential Equations
Stochastic Processes in Continuous Time
Conditional Expectation and Change of
Measure
Change of Time Methods

471
485
495

Term Structure Modeling

The Concept and Measures of Interest Rate
Volatility

Short-Rate Term Structure Models

Static Term Structure Modeling in Discrete
and Continuous Time
The Dynamic Term Structure Model
Essential Classes of Interest Rate Models and
Their Use
A Review of No Arbitrage Interest Rate
Models

Trading Cost Models

Modeling Market Impact Costs

Volatility
Monte Carlo Simulation in Finance
Stochastic Volatility

507
519

531
533
543
559
575
593
603

621
623

635
637
653