Financial engineering
| Fields |
The main applications of financial engineering[1][2]are to:
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Financial engineeringis a multidisciplinary field involvingfinancial theory, methods ofengineering, tools ofmathematicsand the practice ofprogramming.[3]It has also been defined as the application of technical methods, especially frommathematical financeandcomputational finance, in the practice offinance.[4]
Financial engineering plays a key role in a bank'scustomer-driven derivatives business[5]— delivering bespokeOTC-contractsand"exotics", and implementing variousstructured products— which encompasses quantitative modelling, quantitative programming andrisk managingfinancial products in compliance with the regulations andBaselcapital/liquidity requirements.
An older use of the term "financial engineering" that is less common today is aggressive restructuring of corporatebalance sheets.[citation needed]Mathematical finance is the application ofmathematicsto finance.[6]Computational finance and mathematical finance are both subfields of financial engineering.[citation needed]Computational finance is a field in computer science and deals with the data and algorithms that arise in financial modeling.
Discipline
[edit]Financial engineering draws on tools fromapplied mathematics,computer science,statisticsandeconomic theory.[7]In the broadest sense, anyone who uses technical tools in finance could be called a financial engineer, for example anycomputer programmerin abankor anystatisticianin a government economic bureau.[8]However, most practitioners restrict the term to someone educated in the full range of tools of modern finance and whose work is informed by financial theory.[9]It is sometimes restricted even further, to cover only those originating new financial products and strategies.[6]
Despite its name, financial engineering does not belong to any of thefieldsin traditional professional engineering even though many financial engineers have studied engineering beforehand and many universities offering a postgraduate degree in this field require applicants to have a background in engineering as well.[10][11]In the United States, theAccreditation Board for Engineering and Technology(ABET) does not accredit financial engineering degrees.[12]In the United States, financial engineering programs are accredited by theInternational Association of Quantitative Finance.[13]
Quantitative analyst("Quant") is a broad term that covers any person who uses math for practical purposes, including financial engineers. Quant is often taken to mean "financial quant", in which case it is similar to financial engineer.[14]The difference is that it is possible to be a theoretical quant, or a quant in only one specialized niche in finance, while "financial engineer" usually implies a practitioner with broad expertise.[15]
"Rocket scientist" (aerospace engineer) is an older term, first coined in the development of rockets in WWII (Wernher von Braun), and later, theNASAspace program; it was adapted by the first generation of financial quants who arrived onWall Streetin the late 1970s and early 1980s.[16]While basically synonymous with financial engineer, it implies adventurousness and fondness fordisruptive innovation.[17]Financial "rocket scientists" were usually trained in applied mathematics,statisticsor finance and spent their entire careers in risk-taking.[18]They were not hired for their mathematical talents, they either worked for themselves or applied mathematical techniques to traditional financial jobs.[9][17]The later generation of financial engineers were more likely to have PhDs in mathematics,physics, electrical and computer engineering, and often started their careers in academics or non-financial fields.[19][20]
Criticisms
[edit]One of the prominent critics of financial engineering isNassim Taleb, a professor of financial engineering atPolytechnic Institute of New York University[21]who argues that it replaces common sense and leads to disaster. A series of economic collapses has led many governments to argue a return to "real"engineeringfrom financial engineering. A gentler criticism came fromEmanuel Derman[22]who heads a financial engineering degree program at Columbia University. He blames over-reliance on models for financial problems; seeFinancial Modelers' Manifesto.
Many other authors have identified specific problems in financial engineering that caused catastrophes:
- Aaron Brown[23]named confusion between quants and regulators over the meaning of "capital"
- Felix Salmon[24]gently pointed to theGaussian copula(seeDavid X. Li § CDOs and Gaussian copula)
- Ian Stewart[25]criticized theBlack-Scholes formula
- Pablo Triana[26](along with othersincluding Taleb and Brown) dislikesvalue at risk
- Scott Patterson[27][28]accused quantitative traders and later high-frequency traders.
Thefinancial innovationoften associated with financial engineers was mocked by former chairman of the Federal ReservePaul Volckerin 2009 when he said it was a code word for risky securities, that brought no benefits to society. For most people, he said, the advent of theATMwas more crucial than anyasset-backed bond.[29]
Education
[edit]The firstMaster of Financial Engineeringdegree programs were set up in the early 1990s. The number and size of programs has grown rapidly, to the extent that some now use the term "financial engineer" to refer to a graduate in the field.[7]The financial engineering program atNew York University Polytechnic School of Engineeringwas the first curriculum to be certified by theInternational Association of Financial Engineers.[30][31]The number, and variation, of these programs has grown over the decades subsequent (seeMaster of Quantitative Finance § History); and lately includes undergraduate study, as well asdesignationssuch as theCertificate in Quantitative Finance.
See also
[edit]References
[edit]- ^Marek Capiski and Tomasz Zastawniak,Mathematics for Finance: An Introduction to Financial Engineering, Springer (November 25, 2010) 978-0857290816
- ^David Ruppert,Statistics and Data Analysis for Financial Engineering, Springer (November 17, 2010) 978-1441977861
- ^"MS in Financial Engineering". Columbia University Department of Industrial Engineering and Operations Research.Archivedfrom the original on 2017-01-19. Retrieved2017-01-18.
- ^Tanya S. Beder and Cara M. Marshall,Financial Engineering: The Evolution of a Profession, Wiley (June 7, 2011) 978-0470455814
- ^Qu, Dong (2016).Manufacturing and Managing Customer-Driven Derivatives. Wiley.ISBN978-1-118-63262-8.
- ^abRobert Dubil,Financial Engineering and Arbitrage in the Financial Markets, Wiley (October 11, 2011) 978-0470746011
- ^ab"What is Financial Engineering?". International Association of Financial Engineers. Archived fromthe originalon 2012-06-30. Retrieved2012-07-22.
- ^Ali N. Akansu and Mustafa U. Torun. (2015), A Primer for Financial Engineering: Financial Signal Processing and Electronic Trading, Boston, MA: Academic Press,ISBN978-0-12-801561-2
- ^abSalih N. Neftci,Principles of Financial Engineering, Academic Press (December 15, 2008) 978-0123735744
- ^Entry requirements | Imperial College Business School. 2016. Entry requirements | Imperial College Business School. [ONLINE] Available at:http://wwwf.imperial.ac.uk/business-school/programmes/msc-risk-management/entry-requirements/Archived2016-06-27 at theWayback Machine. [Accessed 30 June 2016]. Add to My References
- ^"Master Financial Engineering postgraduate distance learning-TU Kaiserslautern".
- ^"List of Member Societies".ABET.Archivedfrom the original on 2013-04-30. Retrieved26 April2013.
- ^"{title}".Archivedfrom the original on 2018-06-13. Retrieved2018-08-21.
- ^Espen Gaarder Haug,Derivatives Models on Models, Wiley (July 24, 2007) 978-0470013229
- ^Richard R. Lindsey and Barry Schachter (editors),How I Became a Quant: Insights from 25 of Wall Street's Elite, Wiley (August 3, 2009) 978-0470452578
- ^Emanuel Derman,My Life as a Quant: Reflections on Physics and Finance, Wiley (September 16, 2004) 978-0471394204
- ^abAaron Brown,Red-Blooded Risk: The Secret History of Wall Street, Wiley (October 11, 2011) 978-1118043868
- ^Aaron Brown,The Poker Face of Wall Street, Wiley (March 31, 2006) 978-0470127315
- ^Dan Stefanica,A Primer for the Mathematics of Financial Engineering, FE Press (April 4, 2008) 978-0979757600
- ^Akansu, Ali N.; Kulkarni, Sanjeev R.; Malioutov, Dmitry M., Eds. (2016), Financial Signal Processing and Machine Learning, Hoboken, NJ: Wiley-IEEE Press,ISBN978-1-118-74567-0
- ^Nassim Nicholas Taleb,The Black Swan: The Impact of the Highly Improbable, Random House (April 17, 2007) 978-1400063512
- ^Emanuel Derman,Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life, Free Press (July 24, 2012) 978-1439164990
- ^"Whodunit? Rocket Scientists on Wall Street". Minyanville.Archivedfrom the original on 2012-07-11. Retrieved2012-07-22.
- ^"Recipe for Disaster: The Formula that Killed Wall Street". Wired. February 23, 2009.Archivedfrom the original on 2012-07-26. Retrieved2012-07-22.
- ^Stewart, Ian (February 12, 2012)."The Mathematical Equation that Caused the Banks to Crash". London: Wired.Archivedfrom the original on 2013-09-27. Retrieved2012-07-22.
- ^< Pablo Triana, The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis, Wiley (December 6, 2011) 978-0470529737
- ^< Scott Patterson,The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, Crown Business (February 2, 2010) 978-0307453372
- ^< Scott Patterson,Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System, Crown Business (June 12, 2012) 978-0307887177
- ^"Crisis may be worse than Depression, Volcker says". Reuters. Feb 20, 2009.Archivedfrom the original on 2013-09-28. Retrieved2013-09-05.
- ^"{title}".Archivedfrom the original on 2013-04-10. Retrieved2013-04-25.
- ^"The Department of Finance and Risk Engineering". Polytechnic Institute of NYU.Archivedfrom the original on 2014-01-04. Retrieved2012-05-09.
Further reading
[edit]- Beder, Tanya S.; Marshall, Cara M. (2011).Financial Engineering: The Evolution of a Profession. John Wiley & Sons.
