A Guide for the Perplexed Quant

Deep inside, everyone recognizes that the purpose of building models is divination - foretelling the future, and controlling it. Three types of models include: 1. fundamental models, 2. phenomenological models, and 3. statistical models. The fundamental problem of options theory is the valuation of...

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Bibliographic Details
Published in:The Journal of derivatives 2000-12, Vol.8 (2), p.58-64
Main Author: Derman, Emanuel
Format: Article
Language:English
Subjects:
Managerial skills
Mathematical analysis
Mathematical models
Securities markets
Online Access:Get full text
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Summary:Deep inside, everyone recognizes that the purpose of building models is divination - foretelling the future, and controlling it. Three types of models include: 1. fundamental models, 2. phenomenological models, and 3. statistical models. The fundamental problem of options theory is the valuation of hybrid, non-linear securities, and options theory is an ingenious but glorified method of interpolation. The fundamental problem of financial modeling is how to turn opinions about the future into current dollar values. A usable model has to provide both input and a way of speaking that comes naturally. The current demand on Wall Street right now is for electronic distribution and its infrastructure. But there is a lot of value to research. Models cannot be easily proved "right" by observation; data are scarce, and the financial world of human action and reaction is non-stationary.
ISSN:1074-1240
2168-8524
DOI:10.3905/jod.2000.319152