ON BECOMING A QUANT - Mark S. Joshi

1 ON BECOMING A QUANTMARK JOSHI1. WH AT D O E S A QUAN T D O?A QUANT designs and implements mathematical models for the pricingof derivatives, assessment of risk, or predicting market WH AT S O RTS O F QUAN T A RE TH E R E?(1) Front office/desk QUANT (2) Model validating QUANT (3) Research QUANT (4) QUANT developer(5) Statistical arbitrage QUANT (6) Capital quantA desk QUANT implements pricing models directly used by traders. Mainplusses close to the money and opportunities to move into trading. Mi-nuses can be stressful and depending on the outfit may not involve model validation QUANT independently implements pricing modelsin order to check that front office models are correct.

2 Plusses more re-laxed, less stressful. Minusses model validation teams can be uninspiredand far from the QUANT tries to invent new pricing approaches and sometimescarries out blue-sky research. Plusses it s interesting and you learn a lotmore. Minusses sometimes hard to justify your developer a glorified programmer but well-paid and easier tofind a job. This sort of job can vary a lot. It could be coding scripts quicklyall the time, or working on a large system debugging someone else s arbitrage QUANT , works on finding patterns in data to sug-gest automated trades. The techniques are quite different from those inDate: March 13, Joshi derivatives pricing.

3 This sort of job is most commonly found in hedgefunds. The return on this type of position is highly volatile!A capital QUANT works on modelling the bank s credit exposures andcapital requirements. This is less sexy than derivatives pricing but is be-coming more and more important with the advent of the Basel III bank-ing accord. You can expect decent (but not great) pay, less stress andmore sensible hours. There is currently a drive to mathematically modelthe chance of operational losses through fraud etc, with mixed degrees do banking for the money, and you tend to get paid more thecloser you are to where the money is being made.

4 This translates into asort of snobbery where those close to the money look down on those whoaren t. As a general rule, moving away from the money is easy, movingtowards it is AR E AS O F D ER I VAT I VE S FX Equities Fixed income Credit derivatives Commodities Hybrids Power/energyFX is short for foreign exchange. Contracts tend to be short-dated withhigh volume and simple specifications. Emphasis is therefore on speedand smile means options on stocks and indices. Techniques tend to bePDE based with the local vol model being popular. A typical contract is anote paying some function of the stock price path. Not a particularly income means interest rate derivatives.

5 This is probably the biggestarea by value. The maths is more complex because the underlying ismulti-dimensional. Martingale techniques are used a lot. It s well derivatives are derivatives that pay-off according to the defaultsof corporate entities. This was a big growth area with lots of demandtranslating into very high pay. It displayed some bubble-like character-istics, however, and the bubble has now BECOMING A QUANT3 Commodities, this is also a big growth area with the general rally incommodity prices in recent years. This is the area that seems to be hold-ing up best in the current job are derivatives that pay off according to behaviours in morethan one market this is typically interest rates plus something else.

6 Themain advantage of working on such products is the ability to learn multi-ple and energy derivatives relate to the cost of buying and sellingelectricity. The wholesale market for electricity has some unique SO RTS O F E MP LOY E R SWe can roughly divide employers into Commercial banks, , RBS, HSBC Investment banks, , Goldman Sachs, Lehman Brothers was oneof these and died in spectacular fashion Hedge funds, , the Citadel Group Accountancy firms Software companiesCommercial banks ask less of you, and pay less. Better job banks tend to demand long hours but pay well. Not sogood job funds tend to demand a lot of work. They are very volatile anda big growth industry currently.

7 There is the potential to make a hugeamount of money, but also the potential to be unemployed after a general, American banks pay better but demand longer hours thanEuropean big accountancy firms have QUANT teams for consulting. Someplaces, particularly D-fine, send their employees on the Oxford Masterscourse. The main disadvantage is that you are far from the action, andhigh quality individuals tend to work in banks so it may be hard to findsomeone to learn from. Related places are consultancies and JOSHIT here is BECOMING more of a tendency to outsource QUANT modellingand buy in software models. One option is therefore to work for the soft-ware company instead.

8 The issues are similar to those with working foraccountancy ST U DYWhat should one learn? There is by now a huge number of books avail-able. Standard books are Hull - Options future and other derivatives this is sometimescalled the bible book. Main downside is that it is oriented to-wards MBAs rather than quantitative PhDs. Baxter and Rennie accessible introduction to martingale approachbut oriented towards theory rather than practicalitues Wilmott (Derivatives) good on the PDE approach but not so goodon other any author I recommend my own books: The concepts and practice of mathematical finance, CUP 2003,my objective here was to cover what a good QUANT ought to includes programming projects that I strongly advise you to dobefore applying for jobs.

9 The second edition appeared in 2008. C++ design patterns and derivatives, CUP 2004, this is a secondbook on C++, the objective was to teach the reader how to use thelanguage properly. The second edition appeared in 2008. QUANT job interview questions and answers. We self-publishedthis one. I spent 8 years gathering questions from live QUANT jobinterviews; here they are with answers and possible follow up ques-tions. This is currently available only from More mathematical finance, Sep 2011. This is the sequel to Con-cepts . It takes up where Concepts left off and contain much morediscussion of the numerics and the calculus is useful, but not as important as it at first is hard to find the time to pick it up on the job so it s worth learningin advance.

10 It s also worth spending some time going over basic proba-bility theory eg Chung s books. Some books on stochastic calculus andmartingales which I like areON BECOMING A QUANT5 Williams, Probability with martingales, a remarkably easy to readrigorous account of discrete time martingale theory. (You need toknow the discrete time stuff to learn the continuous case.) Rogers and Williams, particularly Volume 1. Chung and Williams, you need to know continuous time martin-gales first, but if you do it is a nice keep a much more detailed list FO RU MI am now running a book and careers forum to discuss books and get-ting a first job in QUANT which you can access ask me questions via this forum rather than by e-mail.