Financial Books

I have been compiling a quant finance reading list for my own use. My goal for the list is to have a research and scientific bent since the field is still ripe with interesting research questions.

Adaptive Markets: Financial Evolution at the Speed of Thought is a recent new publication by Andrew Lo of MIT Sloane and AlphaSimplex Group about his take on behavioral economics, the efficient market hypothesis. I would strongly recommend listening to Barry Ritholtz's recent interview of Professor Lo on the Masters in Business Program where Lo summarizes the framework of adaptive markets in a nutshell and also gives some color on how he got where he is today. Interestingly, Lo is the first and only person of East Asian descendent who has been on Masters in Business.

One of the textbooks for the University of Chicago's economics Ph.D. program seems to be a pretty good introduction to time series analysis (the bread and butter theory behind mean reversion strategies): Prof. Ruey Tsay's Analysis of Financial Time Series. The downside is that the book uses a kind of dated and niche statistical computing language, S, for all its exercises. In practice, most of this can be fairly easily be converted to a more modern option such as R, Python, or Numpy/Scipy, but it does introduce some friction.

The classic is of course Hull's Options, Futures, and Other Derivatives (9th Edition) . The material seems to be more geared towards i-bank investments such as bond modeling than small time quantitative trading in equities. However, the markets are all related in the end so it is useful to gain a solid background. It is quite encyclopedic, covering everything from standard Black-Scholes derivations to VaR calculations to interest rate models. More recent editions of this book has a chapter that is something of a post-mortem on the recent financial crisis of 2007-2008 and the role that derivatives played in it.

Ganapathy Vidyamurthy's Pairs Trading: Quantitative Methods and Analysis (Wiley Finance) covers basic pairs trading, stat arb, and risk arb. I like how it gives significant background and references (though perhaps not the best references) on each subject.

On more of an entertainment bent, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance is an excellent read. Some of the reviews on Amazon suggest that Chernow is too partial to the Morgans, but I felt that the robber baron perspective is well hashed out in other books and articles. Most such volumes only give a superficial treatment of the Morgans. This book is quite comprehensive. It reads like a historical novel. I highly recommend it.

At the moment, Principles of Quantitative Development is one of the few books (perhaps the only one) on the subject of implementation of a trading platform. It includes discussions about implementations of applicable design patterns, derivatives pricing tools, trade life cycle, data structures, and general trading platform architecture considerations. It even has a short section on functional programming. There are very few reviews of the book so far, mostly very negative.