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Despite being STEM person, I always wanted to learn how stock & financial markets work. I always wanted to know how those stocks work, what are those bonds e.t.c.

The only struggle I am having, is the absence of the book, which describes market in a mathematical way. I mean, after all these years, I get used to books which have a little of text and a lot of formulas.

So, what are some good books on stocks, bonds, derivatives, theories behind them, decision making e.t.c., which are mathematical?

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  • Math background is mostly irrelevant in the selection of books. Everyone starts with the most basic ones, then proceed to the math-heavy ones. money.stackexchange.com/questions/tagged/books . I would personally recommend Investments by Bodie, which is the #1 top selling textbook.
    – base64
    Aug 21, 2015 at 16:56
  • If you click back on the tag "books" you'll see over 2 dozen questions with that tag. Does one of those not answer your question? If not, can you edit your question to clarify? Aug 23, 2015 at 22:56
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    Beware getting too sucked into thinking you can model the markets mathematically. It works for a while, then it doesn't. Read up on Long Term Capital Management to see Nobel laureates and their Nobel prize winning market formulas implode. Markets are a human (psychological) system, not a physical (mathematical) one. It's like poker, not like chess.
    – Patches
    Aug 25, 2015 at 16:23

5 Answers 5

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Those are the three books that were considered fundamental at my university:

Investments - Zvi Bodie (Author), Alex Kane (Author), Alan Marcus (Author), Stylianos Perrakis (Author), Peter Ryan (Author) This book covers the basics of financial markets. It explains how markets work, general investing principles, basic risk notions, various types of financial instruments and their characteristics and portfolio management principles.

Futures and Options markets - John C. Hull This book goes more in depth into derivatives valuation and the less common / more complex instruments.

The Handbook of Fixed Income Securities This books covers fixed income securities.

In all cases, they are not specifically math-oriented but they do not shy away from it when it is called for. I have read the first and the other two were recommended by professors / friends now working in financial markets.

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  • Also please consider that there may be newer editions of each of those books. I linked to the first edition I could find to make sure that you can see which book I referenced.
    – ApplePie
    Aug 23, 2015 at 2:54
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Not perhaps practically useful, but I found it conceptually useful to learn the basics of mathematical finance, a way of describing financial markets via probability theory and stochastic processes. It's a little like trying to understand horse racing by studying spherical horses rolling without friction in a vacuum, but it does give you some ways of thinking that may be more appealing to someone with a math background. For instance, there's the idea that shorting a stock is effectively owning negative shares. Option pricing is a common motivation.

There's a brief introduction, at the advanced undergraduate level, in Durrett's Essentials of Stochastic Processes. At the graduate level, I liked Ruth Williams' Introduction to the Mathematics of Finance.

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My personal favorites are

  1. Options, Futures, and Other Derivatives by John C Hull

  2. Thinking Fast and Slow - Daniel Kahneman

  3. Expected Returns - Antti Ilmanen [check out the video : How to Think About Expected Returns]

It is a 600 page book … A summary of it:

Without a rational expectation of expected returns, investing can lead to severe disappointment and disillusionment. Making a good model to forecast expected returns is so difficult. Near-term expectation is almost impossible. The key is very very much about focusing on the long-term, and on getting returns that are feasible, not outlandish.

There are three pillars that are central:

  • You want to think about historical average returns.
  • You want to think about financial theories, which could be risk-based, but also could be behavioral.
  • Finally and most importantly you need to think about current market conditions. Today is not just another day. There is a lot that is different about today than an average day in the past twenty years. You cannot just use the average values of the past and expect that to happen today. The art of expected returns is to combine the information from all these three pillars and not letting any one of them dominate. That unfortunately means doing three times more work!

Practically, the work of an investment manager today involves finding many different sources of returns, and diversifying effectively between them, and finally being humble about what returns we can expect today.

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Start with Options, Futures and Other Derivatives by John Hull.

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    I do not think that one should start with derivatives without any knowledge of underlying asset classes.
    – base64
    Aug 23, 2015 at 11:42
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Your question was asked and answered at Quant SE, https://quant.stackexchange.com/q/15013.

Ruth J. Williams recommends these books.

F. AitSahlia and K. L. Chung, Elementary Probability Theory, Springer, Fourth Edition.
M. Capinski and T. Zastawniak, Mathematics for finance: an introduction to financial engineering, Springer, 2010.
J. Cvitanic and F. Zapatero, Economics and Mathematics of Financial Markets, MIT Press, 2004.
T. S. Y. Ho and S. B. Lee, The Oxford Guide to Financial Modeling, Oxford, 2004.
J. Hull, Options, Futures and other Derivative Securities, Prentice Hall.
S. Pliska, Introduction to Mathematical Finance, Blackwell, 1998.
S. Ross, An Introduction to Mathematical Finance, Options and other topics, Cambridge University Press, 1999.
J. Stampfli and V. Goodman, The Mathematics of Finance: Modeling and Hedging, Brooks/Cole, Pacific Grove, CA, 2001.
P. Wilmott et al., The Mathematics of Financial Derivatives, Cambridge University Press, 1995.

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