Computational nance

sophisticated computer processing was needed by researchers such as Eugene Fama in order to analyze large
amounts of nancial data in support of the ecientmarket hypothesis.[8]
During the 1970s, the main focus of computational nance shifted to options pricing and analyzing mortgage
securitizations.[11] 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 nance applications.[12] Many of the new techniques came from signal processing and speech recognition rather than traditional elds of computational economics like optimization and time series analysis.[12]

Simulation of Brownian Motion sample paths is an important tool

in calculating the price of nancial instruments under the riskneutral measure.

By the end of the 1980s, the winding down of the

Cold War brought a large group of displaced physicists
and applied mathematicians, many from behind the Iron
Curtain, into nance. These people become known as
nancial engineers (quant is a term that includes both
rocket scientists and nancial engineers, as well as quantitative portfolio managers).[13] This led to a second major extension of the range of computational methods used
in nance, also a move away from personal computers
to mainframes and supercomputers.[11] Around this time
computational nance became recognized as a distinct
academic subeld. The rst degree program in computational nance was oered by Carnegie Mellon University
in 1994.[14]

Computational nance is a branch of applied computer

science that deals with problems of practical interest in
nance.[1] Some slightly dierent denitions are the study
of data and algorithms currently used in nance[2] and the
mathematics of computer programs that realize nancial
models or systems.[3]

Computational nance emphasizes practical numerical

methods rather than mathematical proofs and focuses on
techniques that apply directly to economic analyses.[4] It
is an interdisciplinary eld between mathematical nance
and numerical methods.[5] Two major areas are ecient
and accurate computation of fair values of nancial secuOver the last 20 years, the eld of computational nance
rities and the modeling of stochastic price series.[6]
has expanded into virtually every area of nance, and
the demand for practitioners has grown dramatically.[1]
Moreover, many specialized companies have grown up to
1 History
supply computational nance software and services.[10]
The birth of computational nance 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.[7]
Mathematical nance 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.[8]

2 Applications of Computational
Finance
Algorithmic trading
Quantitative investing
High-frequency trading

In the 1960s, hedge fund managers such as Ed Thorp[9]

and Michael Goodkin (working with Harry Markowitz,
Paul Samuelson and Robert C. Merton)[10] pioneered the
use of computers in arbitrage trading. In academics,

3 See also
List of nance topics
1

5
Quantitative analyst
List of quantitative analysts
Mathematical nance
QuantLib
Algorithmic trading
Master of Computational Finance
Financial reinsurance
Financial modeling

EXTERNAL LINKS

5 External links
IEEE Computational Finance and Economics Technical Committee
An Introduction to Computational Finance without
Agonizing Pain
Introduction to Computational Finance, IEEE Computational Intelligence Society Newsletter, August
2004
Numerical Techniques for Options
Monte Carlo Simulation of Stochastic Processes

References

[1] Rdiger U. Seydel, Tools for Computational Finance,

Springer; 3rd edition (May 11, 2006) 978-3540279235
[2] Computational Finance and Research Laboratory. University of Essex. Retrieved 2012-07-21.
[3] Cornelis A. Los, Computational Finance World Scientic
Pub Co Inc (December 2000) 978-9810244972
[4] Mario J. Miranda and Paul L. Fackler, Applied Computational Economics and Finance, The MIT Press (September
16, 2002) 978-0262134200
[5] Omur Ugur, Introduction to Computational Finance,
Imperial College Press (December 22, 2008) 9781848161924
[6] Jin-Chuan Duan, Wolfgang Karl Hrdle and James E.
Gentle (editors), Handbook of Computational Finance,
Springer (October 25, 2011) 978-3642172533
[7] Harry M. Markowitz, Portfolio Selection: Ecient Diversication of Investments, Wiley, second edition (September 3, 1991) 978-1557861085
[8] Justin Fox, The Myth of the Rational Market: A History of
Risk, Reward, and Delusion on Wall Street, HarperBusiness (June 9, 2009) 978-0060598990
[9] William Poundstone, Fortunes Formula: The Untold Story
of the Scientic Betting System That Beat the Casinos and
Wall Street, Hill and Wang (September 19, 2006) 9780809045990
[10] Michael Goodkin, The Wrong Answer Faster: The Inside
Story of Making the Machine that Trades Trillions, Wiley,
(February 21, 2012) 978-1118133408
[11] Aaron Brown, Red-Blooded Risk: The Secret History of
Wall Street, Wiley (October 11, 2011) 978-1118043868
[12] John F. Ehlers, Rocket Science for Traders, Wiley (July
20, 2001) 978-0471405672
[13] Aaron Brown, The Poker Face of Wall Street, Wiley
(March 31, 2006) 978-0470127315
[14] Center for Computational Finance. Carnegie Mellon
University. Retrieved 2012-07-21.

Centre for Computational Finance and Economic

Agents (CCFEA)
The Journal of Computational Finance

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