Mathematics, philosophy, code, travel and everything in between. More about me…

I write about

English | Czech
Choose your language. I write in English, but I translate many of my articles to Czech as well. Zvolte si jazyk. Píšu anglicky, ale řadu svých článků překládám i do češtiny.

My Life as a Quant: Insider Account Of Financial Engineering

One of the most interesting books I have recently read is a sort-of autobiography by Emanuel Derman – particle physicist, Wall Street financial engineer and university professor. It is mostly concerned with quantitative finance, a field that developed in the eighties and today holds an important position in the financial world.

Quantitative finance is a blend of programming, mathematics, and finance. Those who know me are probably smiling right now. There are no areas that interest me more than these three. Let’s just add that Derman’s specialty are option derivatives and we have a book written just for me :-). Because of this (but not only this) the book was extremely interesting and educational for me.

My Life as a Quant

The first chapters are mostly about theoretical physics. Derman describes his difficult scientific career of a particle physic, successes and disappointments, research positions at various universities… Then comes the turning point: the author leaves academics and starts working in Research & Development at Bell. This part is interesting from programmer’s point of view. At Bell Derman learned to program well, he got to know UNIX and C… a computer scientist’s heart rejoices when Derman belauds the well-known UNIX tools like ed, awk, yacc etc. And then comes the third part – the author is hired by Goldman Sachs to work in a team developing quantitative investment strategies.

This part was obviously the most interesting one for me. In the beginning, Derman worked on a pricing model for options on bonds. Together with the famous Fischer Black he found a way how to adapt the well-known Black-Scholes model (which models stock options prices) to model bond options. The model is explained nicely and with pictures (only the maths is simplified too much :-)). Derman’s next success was explanation of “the smile”, a peculiar asymmetry which started to appear in the derivative markets after the market crashes in the eighties and which reflected the increased fear of sudden panic-driven crashes. All models and methods are explained in a really accessible and understandable way. Nevertheless, the book is not just about mathematics and finance. You will learn a lot of interesting facts about the background of an investment bank, about the collaboration with Black, about traders, managers, technologies…

My Life as a Quant provides an interesting insight into the world of investment banks, their power, capacities… you very clearly realize just how big players you are taking on in the financial markets. A lot of traders are destroyed by the false idea that they are “smarter than the market”, that they discovered something that the others don’t know. After reading this book, I cannot imagine I could ever think that again. Any strategy, any indicator, any mathematical model you can think of – I bet that supercomputers and teams of PhD’s on Wall Street or Square Mile has analyzed all that ages ago. It doesn’t mean that it is impossible to profit in the markets, but it certainly puts your potential into perspective.

If you are interested in finance at least a little bit, I would recommend My Life as a Quant: Reflections on Physics and Finance in a heartbeat.

September 26, MMX — Books, Finance.