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

2. COMPUTATIONAL FINANCE Need to discuss 1. FINANCE 2. COMPUTATIONAL

3. First Things First FINANCE: Both OLD & NEW Emphasis on NEW - Late 1950’s: Portfolio Theory - Late 1960’s: Corporate Finance - 1970’s: Derivatives/Options - 1980’s: CME, CBOT Trading Financials - 1990’s: Deregulation & Globalization

4. 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

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

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

7. 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?

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

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

10. Financial skills during Mid 1980-90’s Financial Analyst Financial Analyst Statistical/Mathematical Analyst Statistical/Mathematical Analyst Computer Experts Computer Experts The emergence of computational finance/math finance/financial engineering

11. 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.

12. 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

13. A long list of programs with a brief summary can be found at: www.siam.org/financialmath/programs.htm

14. Baruch College MS, Applied Mathematics for Finance http://math.baruch.cuny.edu/masters.html Boston University MA, Mathematical Finance http://www.bu.edu/mathfn/ Brooklyn Polytechnic University MS, Financial Engineering http://www.poly.edu/catalog02-03/catalog02-03-25-financeeng.pdf Carnegie Mellon University MS, Computational Finance http://www.cmu.edu/mscf Claremont University MS, Financial Engineering Management http://www.cgu.edu/fineng/ Columbia University MS, Industrial Engineering and Operations Research http://www.engineering.columbia.edu/students/academics/dept/ieor.php Columbia University Masters in Mathematics of Finance http://www.math.columbia.edu/department/masters_finance.shtml

15. Cornell University MS, Engineering in Operations Research and Industrial Engineering http://www.orie.cornell.edu/ Florida State University MS, Financial Mathematics http://www.math.fsu.edu/~smith/Guides/finmath.html Georgia Institute of Technology MS, Quantitative and Computational Finance http://www.qcf.gatech.edu/ George Washington University MS, Finance http://www.gwu.edu/~finance/ New York University, Courant Institute of Mathematical Sciences MS, Mathematical Finance http://www.math.nyu.edu/financial_mathematics/ North Carolina State University MS, Financial Mathematics http://www.math.ncsu.edu/finmath

16. OGI School of Science and Engineering MS, Computational Finance http://www.cse.ogi.edu/CompFin/ Oklahoma State University MS, Quantitative Finance http://www.siam.org/financialmath/www.bus.okstate.edu/msqfe Princeton University MS, Finance http://www.princeton.edu/~bcf/ Purdue University MS degree in Mathematics with Computational Finance Specialization http://www.math.purdue.edu/academics/graduateProgram/cfp.php MS degree in Statistics with Computational Finance Specialization http://www.stat.purdue.edu/compfinance/ Rutgers University Masters of Quantitative Finance http://business.rutgers.edu/graduate/mqf/default.htm Stanford University MS, Financial Mathematics http://math.stanford.edu/FinMath/

17. University of California, Berkeley MS, Financial Engineering http://www.haas.berkeley.edu/MFE University of Chicago MS, Financial Mathematics http://www-finmath.uchicago.edu/ University of Michigan MSE in Financial Engineering http://interpro.engin.umich.edu/fep University of Southern California MS, Mathematical Finance http://www.usc.edu/dept/LAS/CAMS/MF/ University of Toronto MMF, Masters of Mathematical Finance http://www.mmf.utoronto.ca/main.php3 University of Waterloo Masters in Finance http://arts.uwaterloo.ca/ACCT/finance/

18. Ranking of Financial Engineering Programs

19. General Comments About the Top Five Programs

20. 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

21. 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

22. 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

23. 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

24. 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

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

26. 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

27. 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

28. 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?