Comparison Between Nuclear Physics and Quantitative Finance

Ahmed Rebai,ahmed.rebai2@gmail.com

PhD in Nuclear Physics

Warning and risk disclaimer

Nowadays Trading carries a high level of risk, and may not be suitable

for all investors. Since I am not an economist, an arbitrager, a market analyst, a market bull, a broker, or

even a day trader (for the moment), I disown any responsibility for any

errors or misunderstandings caused by this presentation

1

PLAN

Definitions Similarities: Strategy (Data=>Analysis=>Results) Similarities: Fluctuation and Randomness Similarities: Mathematical Modelling Similarities: Big Catastrophes Some Differences Did finance violate the laws of physics? Conclusion

2

SOME DEFINITIONS

Quantitative Finance: use quantitative techniques like mathematics, statistics, computer science to try to model the value of financial securities and structure them to hedge them. Deal with some questions about:How interest rate be in the futur ? How volatility be in the futur?

Nuclear Physics: study subatomic structure of atoms and nucleons using large experiments, mathematical models and statistics techniques

3

DATA ANALYSIS RESULTS

Both are using the same strategies

SIMILARITIES: SAME STRATEGIES4

DATA

5

DATA (PHYSICS)

Simulation: Monte carlo Generator

Data

Nuclear physics FLUKA, MCNPX, ... Accelerator experiment

Particle physics Pythia, Geant4, ... Diffusion experiments

Astroparticle physics CORSIKA, AIRES, REAS3, ...

Cosmic rays experiments

Data is often generated by experiments or by monte carlo generators.

(A Monte Carlo technique: is any technique making use of random numbers to solve a problem.)

6

DATA (FINANCE)

Special sites: Blommberg, CNBC, Reuters, ex.com, DailyFx.com, ...

Economic official report : Non Farm payroll

(NFP), UK CPI, German GDP, ...

Economic indicator: S&P500, NASDAQ, DOWJONES, FTSE …

Using Monte Carlo to generate data.

7

ANALYSIS8

ANALYSIS (PHYSICS)Data Analysis needs computer resources: programming languages + infrastructures Low level languages: C/C++ (open source) High level languages and Platforms: Python,

IDL, Matlab, ROOT-CERN Linux Environment... GPU/parallel programming: CUDA (NVIDIA) ,

MPI, OpenMP, ...

9

ANALYSIS (FINANCE)

Fundamental analysis take much time, Technical analysis no so sophisticated, Quantitative analysis takes into account market

evolution and its random nature. Then data analysis => pricing proces

(pricing, Forecasting, prediction...) Needs dedicated platforms: Metatrader,

Ninjatrader, Tradestation... High Frequency Trading => using algorithms

C/C++.

10

RESULTS

11

RESULTS (PHYSICS)

Study the fundamental laws of nature.

Search predicted particles by the standard model (eg the Higgs boson)

Or new particles (predicted by supersymmetry theories beyond standard model)

Exploring the universe (dark matter, dark energy)

12

RESULTS (FINANCE)

Predicting the market movement Make a good return

Profit

Money $, €, ...

13

SIMILARITIES (FLUCTUATION & RANDOMNESS)

In nuclear physics: arising from ” the Heisenberg's uncertainty principle” (Quantum nature of laws in atomic and subatomic scales):

=> Can't predict simultaneously the position x and momentum p of particles.

In quantitative finance: arising from ”the efficient-market hypothesis”:

=> Can't predict the future market volatility and

price...

14

SIMILARITIES (FLUCTUATION & RANDOMNESS)

In finance: the only reality is that price may go up or down (increase or decrease):

In quantum physics: quantum state involves a superposition of quantum states of 2 different particles ((Schrodinger's cat paradox):

alive deaddead

15

SIMILARITIES (FLUCTUATION & RANDOMNESS)16

Mathematical Model$ $ $

$

$$

$

$ $

$

$

17

A fluctuating stock price => need for probabilistic models => Random walk model

“Today’s price (PT) = yesterday’s price (P

T-1) + a

change that is independent of all previous information (C

T).”

PT = PT-1 + CT

(Since P1 = C1 P2 = P1 + C2 , P3 = P2 + C3 => PT = PT-1 + CT)

The most important model for equities, currencies, commodities, bonds and indices.

SIMILARITIES: Mathematical Modelling18

SIMILARITIES: Mathematical Modelling

The Cox-Ross-Rubinstein option princing model Uses a discrete-time In a perfectly efficient market:No possibility of

arbitrage, At each time, the price can increase or decrease

and never both simultaneously.

19

The Black and Scholes model

”The history of quants on Wall street is the history of the ways in which practitioners and academics have refined and extended the Black-Scholes model” Emanuel Derman's book (My Life as a Quant: Reflections on Physics and Finance)

SIMILARITIES: Mathematical Modelling20

The Black and Scholes equation can be transformed to a heat equation model:

Many methods of resolution: Green's function formalism, Numerical resolution (e.g finite differences)...

SIMILARITIES: Mathematical Modelling21

SIMILARITIES: Mathematical Modelling

In physics to study the random motion of a free particle in space (phase space)=> Wiener process => Diffusion => heat equation model

More general model : Fokker-Planck equation (Diffusion and convection)

In same case FK equation can be transformed to a heat equation (cosmic rays acceleration)

I'll stop here because things start to be really complicated !!!

22

But when things go wrong:

In finance: Global Financial Crisis, Flash Crash, Loss of money, Recession...

In nuclear physics: Nuclear Holocaust: Hiroshima, Nagasaki Nuclear Incidents: Chernobyl, Fukushima

Similarities: Big Catastrophes23

Similarities: Big Catastrophes24

Similarities: Big Catastrophes

Fukushima

Tchernobyl

Hiroshima

25

Similarities: Big Catastrophes

2010 Flash Crash2008 US Crisis

2008 Europe Crisis

26

SOME DIFFERENCES27

SOME DIFFERENCES

In Finance you are dealing with people ”the crowd psychology”

The world of finance and the world of people is changing all over the time...

History doesn't repeated itself....

Where in physics history repeats itself all

the time you can do the same experiment over and over again (Reproductibility)

In physics you deal with particles, atoms...

28

In physics conservation laws: electric charge conservation, momentum conservation, energy conservation

In finance no conservation laws: There is no conservation law in stock market but it depends on economic model...

SOME DIFFERENCES29

DID FINANCE VIOLATE THE LAWS OF PHYSICS ?

Ban

kru

ptc

y o

f L

eh

man

Bro

t he

rs

The 2008 Financial Crisis

30

DID FINANCE VIOLATE THE LAWS OF PHYSICS ?

The myth of economic exponential growth model meets the finite physics ressources :

Finance have long been inconsistent with physics laws especially since the financial crisis unbalances the instability of the global financial system..

But why ???

31

CONCLUSION

Finance &

Economy

Physicseconophysics

32

FOR MORE INFORMATIONS33