Volatility Markets: Consistent Modeling, Hedging, and Practical Implementation of Variance Swap Market Models : A Review
Hans Buehler’s ‘Volatility Markets: Consistent Modeling, Hedging, and Practical Implementation of Variance Swap Market Models’ presents a deep and comprehensive exploration of variance curve models for equity markets.
Dr. Buehler is on our Top 10 Quants On Wall Street 2023 list and is generally considered one of the smartest quant minds on the planet.
The book, which is a revised version of Buehler’s PhD thesis, delves into the complexities of modeling equity markets by introducing variance curve market models, drawing parallels to the consistent Heath-Jarrow-Merton models in interest rate markets.
Buehler addresses critical aspects of these models, including their existence, market completeness, and integrability. Furthermore, provides insights into efficient simulation and evaluation techniques, which are crucial for practical implementation in the financial industry. The book’s in-depth discussion extends to ‘parameter-hedging’, aimed at reducing risks associated with changes in parameter vectors.
Buehler, drawing from his experience in Deutsche Bank’s Quantitative Products Analytics team, offers a critique of traditional models like Black-Scholes, which fail to capture the ‘volatility skew’ or ‘smile’ seen in real markets due to the stochastic nature of volatility. Reviewing various approaches to this issue, including Dupire’s implied local volatility and various stochastic volatility models like Heston’s model, highlighting their strengths and limitations.
An essential contribution of this work is the development and validation of a specific model for variance swap curve markets.
Buehler demonstrates how this model generates a true martingale process and provides an efficient unbiased Monte-Carlo scheme for its implementation. The practicality of the model is further underscored by its calibration to real-life market data and the discussion on the impact of using multi-factor models for pricing options on variance.
‘Volatility Markets’ stands out for its balanced approach, offering both a rigorous theoretical foundation and practical guidance for implementation in variance swap markets.
The book is an indispensable resource for financial professionals and academics interested in advanced derivative modeling and risk management.
