What is Quantitative Finance?

| August 14, 2013 | 0 Comments

Quantitative Finance is an academic discipline that combines areas of mathematics, computer science, numerical analysis and economics. Arguably, the first major contribution to the subject was by Louis Bachelier with the publication of his PhD thesis, The Theory of Speculation, in 1900, the first time the stochastic process, now called Brownian motion, was used to model the stock price. The most important work since then is the work of Black and Scholes (1973) and Merton (1973) which modelled the log of the stock price as Brownian motion to develop a formula for the price of stock options. The feature of Quantitative Finance which makes it stand out from other areas of Finance is its use of advanced quantitative methods usually seen in areas such as Physics. Indeed, Stochastic Calculus, a major tool in Quantitative Finance, isn’t usually even taught in an undergraduate Mathematics degree. Quantitative Finance aims to explain the prices of derivative securities (assets whose value is derived from some other assets). Numerical analysis is used to construct algorithms to price these derivative securities. In practice the algorithms are quite complex and require heavy use of computer hardware. Technology which can speed up the calculation time, is where computer science knowledge comes in.

 

Category: Quantitative Finance General

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