COMPUTATIONAL FINANCE: OVERVIEW AND FUTURE PROSPECTS A.G. MALLIARIS LOYOLA UNIVERSITY CHICAGO LAMAR UNIVERSITY April 30, 2004

COMPUTATIONAL FINANCE Need to discuss 1. FINANCE 2. COMPUTATIONAL

First Things First FINANCE: Both OLD & NEW Emphasis on NEW - Late 1950’s: Portfolio Theory - Late 1960’s: Corporate Finance ’s: Derivatives/Options ’s: CME, CBOT Trading Financials ’s: Deregulation & Globalization

What Role for Deregulation: What Role for Deregulation: - From Fixed to Flexible Exchange Rates (i.e. No exchange rate controls) - Banking Deregulation (i.e. No interest rate controls Recall Savings & Loans Associations) Recall Savings & Loans Associations) - Repeal from Glass-Steagall Act of 1933

Globalization - Capital Mobility - Increased Trade - European Union & Euro - China & WTO

Current Economic Environment - Competitive - Global - Volatile - From Production to Finance - Risk Management

The Role of the Fed - Fight Inflation - Asset Bubbles: Japan in early 1990’s & U.S. in late 1990’s - Does the Fed lead or follow financial markets?

FINANCE TODAY: 4 KEY AREAS - CORPORATE - INVESTMENTS - BANKING - GLOBAL/MULTINATIONAL

Consider Investments Consider Investments - Stocks - Bonds - Derivatives - Mutual Funds - Hedge Funds - Other

Financial skills during Mid ’s Financial Analyst Financial Analyst Statistical/Mathematical Analyst Statistical/Mathematical Analyst Computer Experts Computer Experts The emergence of computational finance/math finance/financial engineering

Computational You are the experts You are the experts Commercial Packages: Bloomberg, Reuters 3000Xtra, BridgeStation Commercial Packages: Bloomberg, Reuters 3000Xtra, BridgeStation Spreadsheets. Example: Mary Jackson and Mike Staunton, Advanced Modelling in Finance Using Excel and VBA. Spreadsheets. Example: Mary Jackson and Mike Staunton, Advanced Modelling in Finance Using Excel and VBA. MATLAB. Example: Paolo Brandimarte, Numerical Methods in Finance. MATLAB. Example: Paolo Brandimarte, Numerical Methods in Finance.

The First 5-year period of Computational Finance About 30 programs Differ in emphasis: math, statistics, finance, computation Differ in emphasis: math, statistics, finance, computation Size of Faculty:10-20 Size of Faculty:10-20 Duration 9 months vs. 2 years Duration 9 months vs. 2 years Number of students: 10 – 40/ 200 Number of students: 10 – 40/ 200

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

Baruch College MS, Applied Mathematics for Finance Boston University MA, Mathematical Finance Brooklyn Polytechnic University MS, Financial Engineering Carnegie Mellon University MS, Computational Finance Claremont University MS, Financial Engineering Management Columbia University MS, Industrial Engineering and Operations Research Columbia University Masters in Mathematics of Finance

Cornell University MS, Engineering in Operations Research and Industrial Engineering Florida State University MS, Financial Mathematics Georgia Institute of Technology MS, Quantitative and Computational Finance George Washington University MS, Finance New York University, Courant Institute of Mathematical Sciences MS, Mathematical Finance North Carolina State University MS, Financial Mathematics

OGI School of Science and Engineering MS, Computational Finance Oklahoma State University MS, Quantitative Finance Princeton University MS, Finance Purdue University MS degree in Mathematics with Computational Finance Specialization MS degree in Statistics with Computational Finance Specialization Rutgers University Masters of Quantitative Finance Stanford University MS, Financial Mathematics

University of California, Berkeley MS, Financial Engineering University of Chicago MS, Financial Mathematics University of Michigan MSE in Financial Engineering University of Southern California MS, Mathematical Finance University of Toronto MMF, Masters of Mathematical Finance University of Waterloo Masters in Finance

Ranking of Financial Engineering Programs

General Comments About the Top Five Programs

Haas School of Business Master’s in Financial Engineering Master’s in Financial Engineering One year program One year program Faculty from Haas, UCLA, UC Irvine Faculty from Haas, UCLA, UC Irvine Theoretical (Mathematical) Finance and Computer Modeling Theoretical (Mathematical) Finance and Computer Modeling

Columbia University Two Programs offered Two Programs offered Industrial Engineering and Operations Research Industrial Engineering and Operations Research MA in Mathematics with Specialization in Mathematics of Finance MA in Mathematics with Specialization in Mathematics of Finance Emphasis on Stochastics, Numerics and Financial Applications Emphasis on Stochastics, Numerics and Financial Applications

New York University Program of 12 courses offered in Mathematics Department Program of 12 courses offered in Mathematics Department Financial Theory and Modeling Financial Theory and Modeling Mathematical Foundations Mathematical Foundations Computational Skills Computational Skills

Cornell University Financial Engineering offered in the School of Operations Research and Industrial Engineering Financial Engineering offered in the School of Operations Research and Industrial Engineering Emphasis on Applied Mathematics Emphasis on Applied Mathematics Collaboration with Management Collaboration with Management

University of Chicago Offered by the Mathematics Department Offered by the Mathematics Department Emphasis on Mathematics: Analysis, Probability, Stochastic Processes Emphasis on Mathematics: Analysis, Probability, Stochastic Processes Minor collaboration with School of Business Minor collaboration with School of Business Numerous speakers presenting applications Numerous speakers presenting applications

Carnegie Mellon Master of Science in Computational Finance Master of Science in Computational Finance Customized Customized Computational Computational Centered Centered

General Conclusions Large variety of programs Large variety of programs Housed in various Schools and Departments Housed in various Schools and Departments Mostly at the Masters Level Mostly at the Masters Level Coursework includes Finance, Math, Statistics and Computer Science Coursework includes Finance, Math, Statistics and Computer Science

Prospects If current trends of globalization, deregulation, uncertainty and risk continue, demand for computational finance will remain strong If current trends of globalization, deregulation, uncertainty and risk continue, demand for computational finance will remain strong Robert Shiller: The New Financial Order: Risk in the 21 st Century Robert Shiller: The New Financial Order: Risk in the 21 st Century

Conclusions Computational Finance as an exciting new field Computational Finance as an exciting new field How to best train Computational Financial Analysts? How to best train Computational Financial Analysts? Computer Science + Finance, or Computer Science + Finance, or Finance + Computer Science? Finance + Computer Science?