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Computational finance is a branch of applied computer science that deals with problems of practical interest in finance.Rüdiger U. Seydel, '' tp://nozdr.ru/biblio/kolxo3/F/FN/Seydel%20R.U.%20Tools%20for%20Computational%20Finance%20(4ed.,%20Springer,%202009)(ISBN%203540929282)(O)(348s)_FN_.pdf Tools for Computational Finance', Springer; 3rd edition (May 11, 2006) 978-3540279235 Some slightly different definitions are the study of data and
algorithm In mathematics and computer science, an algorithm () is a finite sequence of rigorous instructions, typically used to solve a class of specific problems or to perform a computation. Algorithms are used as specifications for performing ...
s currently used in finance and the mathematics of computer programs that realize financial
models A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure. Models c ...
or systems.Cornelis A. Los, ''Computational Finance'' World Scientific Pub Co Inc (December 2000) Computational finance emphasizes practical numerical methods rather than
mathematical proof A mathematical proof is an inferential argument for a mathematical statement, showing that the stated assumptions logically guarantee the conclusion. The argument may use other previously established statements, such as theorems; but every proo ...
s and focuses on techniques that apply directly to economic analyses.Mario J. Miranda and Paul L. Fackler, ''Applied Computational Economics and Finance'', The MIT Press (September 16, 2002) It is an interdisciplinary field between
mathematical finance Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. In general, there exist two separate branches of finance that require ...
and numerical methods.Omur Ugur, ''Introduction to Computational Finance'', Imperial College Press (December 22, 2008) Two major areas are efficient and accurate computation of fair values of
financial securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
and the modeling of stochastic time series.Jin-Chuan Duan, Wolfgang Karl Härdle and James E. Gentle (editors), ''Handbook of Computational Finance'', Springer (October 25, 2011)


History

The birth of computational finance as a discipline can be traced to Harry Markowitz in the early 1950s. Markowitz conceived of the portfolio selection problem as an exercise in mean-variance optimization. This required more computer power than was available at the time, so he worked on useful algorithms for approximate solutions.Harry M. Markowitz, ''Portfolio Selection: Efficient Diversification of Investments'', Wiley, second edition (September 3, 1991) 978-1557861085 Mathematical finance began with the same insight, but diverged by making simplifying assumptions to express relations in simple closed forms that did not require sophisticated computer science to evaluate.Justin Fox, ''The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street'', HarperBusiness (June 9, 2009) In the 1960s, hedge fund managers such as Ed ThorpWilliam Poundstone, ''Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street'', Hill and Wang (September 19, 2006) and Michael Goodkin (working with Harry Markowitz, Paul Samuelson and Robert C. Merton)Michael Goodkin, ''The Wrong Answer Faster: The Inside Story of Making the Machine that Trades Trillions'', Wiley, (February 21, 2012) pioneered the use of computers in
arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between t ...
trading. In academics, sophisticated computer processing was needed by researchers such as Eugene Fama in order to analyze large amounts of financial data in support of the efficient-market hypothesis. During the 1970s, the main focus of computational finance shifted to options pricing and analyzing
mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...
securitizations.Aaron Brown, ''Red-Blooded Risk: The Secret History of Wall Street'', Wiley (October 11, 2011) In the late 1970s and early 1980s, a group of young quantitative practitioners who became known as "rocket scientists" arrived on Wall Street and brought along personal computers. This led to an explosion of both the amount and variety of computational finance applications.John F. Ehlers, ''Rocket Science for Traders'', Wiley (July 20, 2001) Many of the new techniques came from
signal processing Signal processing is an electrical engineering subfield that focuses on analyzing, modifying and synthesizing ''signals'', such as sound, images, and scientific measurements. Signal processing techniques are used to optimize transmissions, d ...
and
speech recognition Speech recognition is an interdisciplinary subfield of computer science and computational linguistics that develops methodologies and technologies that enable the recognition and translation of spoken language into text by computers with the mai ...
rather than traditional fields of
computational economics Computational Economics is an interdisciplinary research discipline that involves computer science, economics, and management science.''Computational Economics''."About This Journal"an"Aims and Scope" This subject encompasses computational mod ...
like optimization and time series analysis. By the end of the 1980s, the winding down of the Cold War brought a large group of displaced
physicist A physicist is a scientist who specializes in the field of physics, which encompasses the interactions of matter and energy at all length and time scales in the physical universe. Physicists generally are interested in the root or ultimate caus ...
s and applied mathematicians, many from behind the
Iron Curtain The Iron Curtain was the political boundary dividing Europe into two separate areas from the end of World War II in 1945 until the end of the Cold War in 1991. The term symbolizes the efforts by the Soviet Union (USSR) to block itself and its s ...
, into finance. These people become known as " financial engineers" ("quant" is a term that includes both rocket scientists and financial engineers, as well as quantitative portfolio managers).Aaron Brown, ''The Poker Face of Wall Street'', Wiley (March 31, 2006) 978-0470127315 This led to a second major extension of the range of computational methods used in finance, also a move away from personal computers to mainframes and supercomputers. Around this time computational finance became recognized as a distinct academic subfield. The first degree program in computational finance was offered by
Carnegie Mellon University Carnegie Mellon University (CMU) is a private research university in Pittsburgh, Pennsylvania. One of its predecessors was established in 1900 by Andrew Carnegie as the Carnegie Technical Schools; it became the Carnegie Institute of Technolog ...
in 1994. Over the last 20 years, the field of computational finance has expanded into virtually every area of finance, and the demand for practitioners has grown dramatically. Moreover, many specialized companies have grown up to supply computational finance software and services.


Applications of Computational Finance

*
Algorithmic trading Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...
*
Quantitative investing Quantitative analysis is the use of mathematical and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivat ...
* High-frequency trading


See also

* Outline of finance * Quantitative analyst *
List of quantitative analysts This is a list of ''notable'' quantitative analysts (by ''surname''); see also § Seminal publications there, and List of financial economists. Pioneers * Kenneth Arrow, (1921 – 2017), American economist, Social choice theory. * Louis Bacheli ...
*
Mathematical finance Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. In general, there exist two separate branches of finance that require ...
*
Financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming. It has also been defined as the application of technical methods, especially from mathe ...
* QuantLib *
Master of Computational Finance Master or masters may refer to: Ranks or titles * Ascended master, a term used in the Theosophical religious tradition to refer to spiritually enlightened beings who in past incarnations were ordinary humans *Grandmaster (chess), National Master ...
* Master of Quantitative Finance * Financial reinsurance * Financial modeling


References


External links


IEEE Computational Finance and Economics Technical CommitteeAn Introduction to Computational Finance without Agonizing PainIntroduction to Computational Finance, IEEE Computational Intelligence Society Newsletter, August 2004Centre for Computational Finance and Economic Agents (CCFEA)The Journal of Computational Finance
{{Finance Mathematical finance Actuarial science Computational fields of study