Academic journal article Journal of Risk and Insurance

Stochastic Optimization Models in Finance-2006 Edition

Academic journal article Journal of Risk and Insurance

Stochastic Optimization Models in Finance-2006 Edition

Article excerpt

Stochastic Optimization Models in Finance - 2006 edition, William T. Ziemba and Raymond G. Vickson, 2006, Singapore: World Scientific Publishing Company, pp. xxxv + 719.

Many Journal of Risk and Insurance readers are familiar with the book Foundations of Insurance Economics, a collection and survey of many of the seminal articles in the economics of risk and insurance. Some of us recall that book fondly as the basis for a graduate course or qualifying exam in risk and insurance theory.

Stochastic Optimization Models in Finance very nicely serves a similar purpose in its eponymous theoretical field. The book is a treasure trove of reprints of original, foundational papers (28 in all), supplemented by five articles written specifically for this volume, several literature reviews, and a substantial collection of impressive and thought-provoking exercises. If supplemented by selected and more recent readings from the financial optimization under uncertainty literature, this text could form the basis for a year-long graduate course of the first order.

The single prior, original edition of this text dates back to 1975. The new 2006 edition is a welcome reissue, both for the reavailability of the original book and for the additional introductory essay that places the original material in an updated context by referencing research performed and published since 1975. A partial list of authors of the articles compiled in this volume - Fama, Merton, Modigliani, Samuelson, and Stiglitz, to name just a few - is self-recommending.

The book and its seminal article reprints are categorized into five sections, with each section introduced with a survey and literature review by the editors. Part I, "Mathematical Tools," covers expected utility theory, convexity and Kuhn-Tucker conditions, and an introduction to dynamic programming. Part II, "Qualitative Economic Results," contains subsections dealing with stochastic dominance, risk-aversion measures, and separation theorems. This part contains an old friend of many Journal of Risk and Insurance readers: a reprint of Pratt's "Risk Aversion in the Small and in the Large. " Part III, "Static Portfolio Selection Models," contains articles on mean-variance and safety-first approaches, existence and diversification of optimal portfolio policies, and the effects of taxes on risk taking. …

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