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by Michael Loh, Josh Laurito, Keith Allman
Financial Simulation Modeling in Excel
Cover Page
Title Page
Copyright
Contents
Preface
Acknowledgments
About the Authors
CHAPTER 1: Introduction
WHAT IS SIMULATION?
CHARACTERISTICS OF A SIMULATION
INSTRUCTIONAL METHODOLOGY
HOW THIS BOOK WORKS
ABOUT THE COMPANION WEBSITE
EXCEL 2003 AND EARLIER VERSUS EXCEL 2007/2010
A FEW WORDS ABOUT SEMANTICS
FINAL REMINDERS
CHAPTER 2: Random Numbers, Distributions, and Basic Simulation Setup
SEED VARIABLES AND RANDOM NUMBER GENERATION
DISTRIBUTIONS
NORMAL PSEUDORANDOM NUMBERS
QUICKLY GENERATING NORMAL PSEUDORANDOM NUMBERS USING PREBUILT EXCEL FUNCTIONS
OTHER METHODS OF GENERATING NORMAL PSEUDORANDOM NUMBERS
PUTTING TOGETHER A MORE DEVELOPED SIMULATION USING THE FUNDAMENTAL COMPONENTS
BROWNIAN MOTION AND WIENER PROCESSES
UNDERSTANDING SIMULATION RESULTS
THIS IS JUST THE BEGINNING
CHAPTER 3: Correlation
THE BASIC IDEA OF CORRELATION
CORRELATION IN A FINANCIAL CONTEXT
PRODUCING SETS OF CORRELATED NORMAL RANDOM NUMBERS USING MATRIX MATHEMATICS
GOING FORWARD USING OUR TOOLS
CHAPTER 4: Option Pricing
BINOMIAL TREES
HULL-WHITE INTEREST RATE MODEL
HULL-WHITE TRINOMIAL TREE
TERM STRUCTURE RECOVERY USING FORWARD INDUCTION
BLACK-SCHOLES OPTION PRICING METHOD
DISCUSSION ON ERRORS
BEYOND PRICE MOVEMENTS
CHAPTER 5: Corporate Default Simulation
THE THEORY BEHIND THE MERTON MODEL
SHORT-TERM AND LONG-TERM LIABILITIES: THE BARRIER AND CALIBRATION
TUNING THE MODEL—DATA SETS AND DRIFT
OTHER METHODS TO DEVELOP DEFAULT PROBABILITIES
DETERMINING LOSS PROBABILITIES FROM BOND PRICES OR CREDIT DEFAULT SWAPS
BOND TERM STRUCTURE AND BOOTSTRAPPING
RECOVERY ASSUMPTIONS
SOVEREIGNS AND MUNICIPALS: NONCORPORATE ISSUERS
FROM ASSETS TO POOLS
CHAPTER 6: Simulating Pools of Assets
DIFFERENCES BETWEEN PROJECTING DEFAULTS AND PRICE MOVEMENTS
VALUE AT RISK (VAR)
STRUCTURED PRODUCTS AND CDOS
TRANSITION MATRICES
KNOWING YOUR ASSETS
CHAPTER 7: Dealing with Data Deficiencies and Other Issues
“GARBAGE IN, GARBAGE OUT”
INCONSISTENT DATA FORMATS
LACK OF DATA
CHAPTER 8: Advanced Topics and Further Reading
VBA AND OTHER LANGUAGES: DIFFERENT PROGRAMS FOR DIFFERENT USES
QUASI–MONTE CARLO AND COMPUTATIONAL TIME
EFFICIENT MARKET HYPOTHESIS AND ITS WEAKNESSES
DISTRIBUTIONS: NASSIM TALEB AND NORMALCY
NEW FRONTIERS OF ECONOPHYSICS
WORKING WITH IMPERFECT MODELS
APPENDIX A: Partial Differential Equations
PARTIAL DERIVATIVES
ORDINARY DIFFERENTIAL EQUATIONS (ODE)
BOUNDARY CONDITIONS
PARTIAL DIFFERENTIAL EQUATIONS
STOCHASTIC DIFFERENTIAL EQUATIONS
APPENDIX B: Newton-Raphson Method
References
FURTHER READING
Index
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