COMPUTATIONAL FINANCE:COMPUTATIONAL FINANCE:

OVERVIEW AND FUTURE OVERVIEW AND FUTURE PROSPECTSPROSPECTS

A.G. MALLIARISA.G. MALLIARISLOYOLA UNIVERSITY CHICAGOLOYOLA UNIVERSITY CHICAGO

LAMAR UNIVERSITYLAMAR UNIVERSITYApril 30, 2004April 30, 2004

COMPUTATIONAL FINANCECOMPUTATIONAL FINANCE

Need to discussNeed to discuss

1. FINANCE1. FINANCE

2. COMPUTATIONAL2. COMPUTATIONAL

First Things FirstFirst Things First

FINANCE: Both OLD & NEWFINANCE: Both OLD & NEW

Emphasis on NEWEmphasis on NEW- Late 1950’s: Portfolio TheoryLate 1950’s: Portfolio Theory- Late 1960’s: Corporate FinanceLate 1960’s: Corporate Finance- 1970’s: Derivatives/Options1970’s: Derivatives/Options- 1980’s: CME, CBOT Trading 1980’s: CME, CBOT Trading

FinancialsFinancials- 1990’s: Deregulation & Globalization1990’s: Deregulation & Globalization

What Role for Deregulation:What Role for Deregulation:- From Fixed to Flexible Exchange From Fixed to Flexible Exchange

RatesRates(i.e. No exchange rate controls)(i.e. No exchange rate controls)

- Banking DeregulationBanking Deregulation(i.e. No interest rate controls(i.e. No interest rate controls Recall Savings & Loans Recall Savings & Loans Associations)Associations)

- Repeal from Glass-Steagall Act of Repeal from Glass-Steagall Act of 19331933

GlobalizationGlobalization

- Capital MobilityCapital Mobility- Increased TradeIncreased Trade- European Union & EuroEuropean Union & Euro- China & WTOChina & WTO

Current Economic Current Economic EnvironmentEnvironment

- CompetitiveCompetitive- GlobalGlobal- VolatileVolatile- From Production to FinanceFrom Production to Finance- Risk ManagementRisk Management

The Role of the FedThe Role of the Fed- Fight InflationFight Inflation- Asset Bubbles: Japan in Asset Bubbles: Japan in

early 1990’s & U.S. in late early 1990’s & U.S. in late 1990’s1990’s

- Does the Fed lead or follow Does the Fed lead or follow financial markets?financial markets?

FINANCE TODAY: 4 KEY AREASFINANCE TODAY: 4 KEY AREAS

- CORPORATE CORPORATE - INVESTMENTSINVESTMENTS- BANKINGBANKING- GLOBAL/MULTINATIONALGLOBAL/MULTINATIONAL

Consider InvestmentsConsider Investments

- StocksStocks- BondsBonds- DerivativesDerivatives- Mutual FundsMutual Funds- Hedge FundsHedge Funds- OtherOther

Financial skills during Mid 1980-90’sFinancial skills during Mid 1980-90’s

• Financial AnalystFinancial Analyst• Statistical/Mathematical AnalystStatistical/Mathematical Analyst• Computer ExpertsComputer Experts

The emergence of computational The emergence of computational finance/math finance/financial finance/math finance/financial engineeringengineering

ComputationalComputational

You are the expertsYou are the experts Commercial Packages: Bloomberg, Commercial Packages: Bloomberg,

Reuters 3000Xtra, BridgeStationReuters 3000Xtra, BridgeStation Spreadsheets. Example: Mary Jackson Spreadsheets. Example: Mary Jackson

and Mike Staunton, and Mike Staunton, Advanced Modelling Advanced Modelling in Finance Using Excel and VBA.in Finance Using Excel and VBA.

MATLAB. Example: Paolo Brandimarte, MATLAB. Example: Paolo Brandimarte, Numerical Methods in Finance.Numerical Methods in Finance.

The First 5-year period of The First 5-year period of ComputationalComputational

FinanceFinance

About 30 programsAbout 30 programs• Differ in emphasis: math, statistics, Differ in emphasis: math, statistics,

finance, computationfinance, computation• Size of Faculty:10-20Size of Faculty:10-20• Duration 9 months vs. 2 yearsDuration 9 months vs. 2 years• Number of students: 10 – 40/ 200Number of students: 10 – 40/ 200

A long list of programs with a brief A long list of programs with a brief summary can be found at:summary can be found at:

www.siam.org/financialmath/www.siam.org/financialmath/programs.htmprograms.htm

Baruch CollegeBaruch CollegeMS, Applied Mathematics for FinanceMS, Applied Mathematics for Financehttp://math.baruch.cuny.edu/masters.htmlhttp://math.baruch.cuny.edu/masters.html

Boston UniversityBoston UniversityMA, Mathematical FinanceMA, Mathematical Financehttp://www.bu.edu/mathfn/http://www.bu.edu/mathfn/

Brooklyn Polytechnic UniversityBrooklyn Polytechnic UniversityMS, Financial EngineeringMS, Financial Engineeringhttp://www.poly.edu/catalog02-03/catalog02-03-25-financeeng.pdfhttp://www.poly.edu/catalog02-03/catalog02-03-25-financeeng.pdf

Carnegie Mellon UniversityCarnegie Mellon UniversityMS, Computational FinanceMS, Computational Financehttp://www.cmu.edu/mscfhttp://www.cmu.edu/mscf

Claremont UniversityClaremont UniversityMS, Financial Engineering ManagementMS, Financial Engineering Managementhttp://www.cgu.edu/fineng/ http://www.cgu.edu/fineng/

Columbia UniversityColumbia UniversityMS, Industrial Engineering and Operations ResearchMS, Industrial Engineering and Operations Researchhttp://www.engineering.columbia.edu/students/academics/dept/http://www.engineering.columbia.edu/students/academics/dept/ieor.phpieor.php

Columbia UniversityColumbia UniversityMasters in Mathematics of FinanceMasters in Mathematics of Financehttp://www.math.columbia.edu/department/masters_finance.shtmlhttp://www.math.columbia.edu/department/masters_finance.shtml

Cornell UniversityCornell UniversityMS, Engineering in Operations Research and Industrial MS, Engineering in Operations Research and Industrial EngineeringEngineeringhttp://www.orie.cornell.edu/http://www.orie.cornell.edu/

Florida State UniversityFlorida State UniversityMS, Financial MathematicsMS, Financial Mathematicshttp://www.math.fsu.edu/~smith/Guides/finmath.htmlhttp://www.math.fsu.edu/~smith/Guides/finmath.html

Georgia Institute of TechnologyGeorgia Institute of TechnologyMS, Quantitative and Computational FinanceMS, Quantitative and Computational Financehttp://www.qcf.gatech.edu/http://www.qcf.gatech.edu/

George Washington UniversityGeorge Washington UniversityMS, FinanceMS, Financehttp://www.gwu.edu/~finance/http://www.gwu.edu/~finance/

New York University, Courant Institute of Mathematical SciencesNew York University, Courant Institute of Mathematical SciencesMS, Mathematical FinanceMS, Mathematical Financehttp://www.math.nyu.edu/financial_mathematics/http://www.math.nyu.edu/financial_mathematics/

North Carolina State UniversityNorth Carolina State UniversityMS, Financial MathematicsMS, Financial Mathematicshttp://www.math.ncsu.edu/finmathhttp://www.math.ncsu.edu/finmath

OGI School of Science and EngineeringOGI School of Science and EngineeringMS, Computational FinanceMS, Computational Financehttp://www.cse.ogi.edu/CompFin/http://www.cse.ogi.edu/CompFin/

Oklahoma State UniversityOklahoma State UniversityMS, Quantitative Finance MS, Quantitative Finance http://www.siam.org/financialmath/www.bus.okstate.edu/msqfehttp://www.siam.org/financialmath/www.bus.okstate.edu/msqfe

Princeton UniversityPrinceton UniversityMS, FinanceMS, Financehttp://www.princeton.edu/~bcf/http://www.princeton.edu/~bcf/

Purdue UniversityPurdue UniversityMS degree in Mathematics with Computational Finance MS degree in Mathematics with Computational Finance SpecializationSpecializationhttp://www.math.purdue.edu/academics/graduateProgram/cfp.phphttp://www.math.purdue.edu/academics/graduateProgram/cfp.phpMS degree in Statistics with Computational Finance SpecializationMS degree in Statistics with Computational Finance Specializationhttp://www.stat.purdue.edu/compfinance/http://www.stat.purdue.edu/compfinance/

Rutgers UniversityRutgers UniversityMasters of Quantitative FinanceMasters of Quantitative Financehttp://business.rutgers.edu/graduate/mqf/default.htmhttp://business.rutgers.edu/graduate/mqf/default.htm

Stanford UniversityStanford UniversityMS, Financial Mathematics MS, Financial Mathematics http://math.stanford.edu/FinMath/http://math.stanford.edu/FinMath/

University of California, BerkeleyUniversity of California, BerkeleyMS, Financial EngineeringMS, Financial Engineeringhttp://www.haas.berkeley.edu/MFEhttp://www.haas.berkeley.edu/MFE

University of ChicagoUniversity of ChicagoMS, Financial MathematicsMS, Financial Mathematicshttp://www-finmath.uchicago.edu/http://www-finmath.uchicago.edu/

University of MichiganUniversity of MichiganMSE in Financial EngineeringMSE in Financial Engineeringhttp://interpro.engin.umich.edu/fephttp://interpro.engin.umich.edu/fep

University of Southern CaliforniaUniversity of Southern CaliforniaMS, Mathematical FinanceMS, Mathematical Financehttp://www.usc.edu/dept/LAS/CAMS/MF/http://www.usc.edu/dept/LAS/CAMS/MF/

University of TorontoUniversity of TorontoMMF, Masters of Mathematical FinanceMMF, Masters of Mathematical Financehttp://www.mmf.utoronto.ca/main.php3http://www.mmf.utoronto.ca/main.php3

University of WaterlooUniversity of WaterlooMasters in FinanceMasters in Financehttp://arts.uwaterloo.ca/ACCT/finance/http://arts.uwaterloo.ca/ACCT/finance/

Ranking of Financial Engineering Ranking of Financial Engineering ProgramsPrograms

General Comments About the General Comments About the Top Five ProgramsTop Five Programs

Haas School of BusinessHaas School of Business

Master’s in Financial EngineeringMaster’s in Financial Engineering One year programOne year program Faculty from Haas, UCLA, UC IrvineFaculty from Haas, UCLA, UC Irvine Theoretical (Mathematical) Finance Theoretical (Mathematical) Finance

and Computer Modelingand Computer Modeling

Columbia UniversityColumbia University

Two Programs offeredTwo Programs offered Industrial Engineering and Operations Industrial Engineering and Operations

ResearchResearch MA in Mathematics with Specialization MA in Mathematics with Specialization

in Mathematics of Financein Mathematics of Finance Emphasis on Stochastics, Numerics Emphasis on Stochastics, Numerics

and Financial Applicationsand Financial Applications

New York UniversityNew York University

Program of 12 courses offered in Program of 12 courses offered in Mathematics DepartmentMathematics Department

Financial Theory and ModelingFinancial Theory and Modeling Mathematical FoundationsMathematical Foundations Computational SkillsComputational Skills

Cornell UniversityCornell University

Financial Engineering offered in the Financial Engineering offered in the School of Operations Research and School of Operations Research and Industrial EngineeringIndustrial Engineering

Emphasis on Applied MathematicsEmphasis on Applied Mathematics Collaboration with ManagementCollaboration with Management

University of ChicagoUniversity of Chicago

Offered by the Mathematics Offered by the Mathematics DepartmentDepartment

Emphasis on Mathematics: Analysis, Emphasis on Mathematics: Analysis, Probability, Stochastic ProcessesProbability, Stochastic Processes

Minor collaboration with School of Minor collaboration with School of BusinessBusiness

Numerous speakers presenting Numerous speakers presenting applicationsapplications

Carnegie MellonCarnegie Mellon

Master of Science in Computational Master of Science in Computational FinanceFinance

CustomizedCustomized ComputationalComputational CenteredCentered

General ConclusionsGeneral Conclusions

Large variety of programsLarge variety of programs Housed in various Schools and Housed in various Schools and

DepartmentsDepartments Mostly at the Masters LevelMostly at the Masters Level Coursework includes Finance, Math, Coursework includes Finance, Math,

Statistics and Computer ScienceStatistics and Computer Science

ProspectsProspects

If current trends of globalization, If current trends of globalization, deregulation, uncertainty and risk deregulation, uncertainty and risk continue, demand for computational continue, demand for computational finance will remain strongfinance will remain strong

Robert Shiller: The New Financial Robert Shiller: The New Financial Order: Risk in the 21Order: Risk in the 21stst Century Century

ConclusionsConclusions

Computational Finance as an exciting Computational Finance as an exciting new fieldnew field

How to best train Computational How to best train Computational Financial Analysts?Financial Analysts?

Computer Science + Finance, orComputer Science + Finance, or Finance + Computer Science?Finance + Computer Science?