Quant news

See this for current quant market condition...

Bank runs

Northern Rock, Alliance & Leicester, Bradford & Bingley...
See this article.

Hiring freeze

A couple of my friends had their offers rescinded. It sucks. See here for more news.

Nice gesture

It was really nice of my manager, or rather ex-manager (who wanted to bring me over to NY), to drop me an email saying I could use her as a reference and also let prospective employers know that I would actually have received a formal offer if not for the US immigration issues.

Suddenly I find myself having so much time I don't really know how to make good use of it. Other than recuperating from the intensive 10 weeks, haha, I've practically got nothing much to do, in terms of stimulating my brain cells. But it's also nice to be idling around for a while. I'll be going home soon!

Maybe I'll take some time off to visit friends in Asia too. Not having any source of income can be a problem though.

Oh yeah, I might have to change the title of this blog now that I will no longer be in the "quant" profession. A short-lived blog I'll have to say.

Disappointed, yet relieved

Apparently I'm supposed to have an offer from the team in NY, however, due to US immigration issues I will not be able to join the team until Oct 2008. And the fact that the team needs someone asap means I have not got an offer. Yes you can imagine that I am very disappointed given the fact that I've worked hard and have got very good reviews, but at the same time I'm relieved that I've finally been informed of a final decision. Could I just blame it on luck?

Anyway, this means I'm very much more inclined to head back home, for a fresh start in getting my career plans sorted. I've never worked in my home country, and I'm clueless as to what kind of quantitative roles there are. I have an interview at home lined up so we'll see how that goes.

Like a friend said, it could be a blessing in disguise, saving me from all the long-working hours and sleep deprivation. I'm not bothered too much really, for once I'm actually looking forward to going home. Another friend told me it'd be a waste to give up on my dreams and walk away, but I've had a taste of what it's like and I enjoyed every bit of the experience. Being a quant doesn't mean working for an IB or a large hedge fund or asset manager only, anyone could ramp up some job descriptions and label it as quant analyst/developer.

I'm more or less set on going home in 2 weeks, and I'll update on what prospects there are.

Weeks 9 & 10

As expected, the % of offers this year isn't as high. I suppose the firm thinks that the credit meltdown isn't just temporary. Anyway, I've thoroughly enjoyed the experience, and I have done pretty well. Some of the guys have been given a full-time offer, and for some, it's back to job search again.

I've got very good reviews from all the desks, BUT have not been given a final hiring decision yet (HR will get back to me next week). That's indeed frustrating and puzzling. Some of the senior managers told me they'll take me in if they could increase headcount. Nice to know that, but doesn't count for much if I don't have an official offer.
Now I'm not sure what to do, either stay in London or go back to Asia. I know my parents want me home, they keep reassuring me I'll find a "decent" job.

Yep, bottom line...I'm left in a limbo. It's been an excellent 10 weeks though. Good luck to quant-wannabes out there.

Fast learner

I find myself to be able to pick things up relatively fast. I guess it's more of being passionate and putting in the effort. A MD asked us to think through if this is where we want to be, where stress levels are high and getting the sack can be purely random. Yes he said fired for no good reason - just because "you're at the wrong place at the wrong time".

Anyway, I think I've found what I really want to do. Research. It's ideal to be "outside" the scene looking in, where you can have a more macro picture of how pieces come together, to independently analyse and critique. I would like a role which involves more analysis work and devising strategies, rather than being a pure quant who only build models and codes them for other users. But I guess as a start, it would be more model-building/coding than writing research pieces.

Everyone is saying the job market for quants and credit-related businesses are suffering, and from what I heard, at least it seems true in the firm. Heard from a fellow intern that credit teams in the markets group are not hiring, so if you're an intern there, just blame it on your luck. As for quants...I'll know soon. If I don't have an offer, I'll probably go back to Asia. Still deciding on that one.

Recently, I've been so immersed in my work that I "forget" to eat. I find myself to be enjoying the challenge, to think hard about a problem. It's different from school when you could somehow get the correct answer. So I've been staying in the office for 14 hours. I may be quick in picking up things that have been done and proven, but perhaps lack the creative juices in solving novel problems.

And oh yeah, WM will be here tomorrow and will be staying for 2 weeks!

Week 8

Incredible week. If you're been following the markets you will know why. Central banks pumped liquidity into the markets to help prevent a downward spiral, but it's anybody's guess if that was the right move. Markets recovered temporarily but as expected it slumped a couple of days later. And a surprise move by the Fed to cut rates led to a rally and a brief breather for the weekend, but next week could see another dramatic unfolding of events.

2 weeks left. With the volatile markets, I guess noone would be willing to add headcount now. We're all rather disheartened by the fact that we'll very likely end the summer jobless. Spoken to quite a few senior managers this week, and everyone asked me to apply to other firms, any firms. They can't guarantee any openings. Not a bad time to go back to school, but where's the money?

I'm working in structured finance now, yeah, the best time to be in this place. Still trying to come to grips with the many variations of SF - ABS, MBS, CMBS, RMBS, CDO, CLO, CBO, CMO, ABCDS, CDO CDS, CDO^2, CPPI, CPDO, ...

Hired a tuxedo which cost me a bomb, even after a 25% student discount. Almost wanted to buy a full set but I don't see myself wearing it again anytime soon.

Feeling rather unsettled now, what will be the outcome come end Aug?

My best friend will be coming over next week, but I'll probably be busy :(

Hot pot

I've been hearing stories about job cuts in Europe, starting from ABN AMRO to Bear Stearns and recently GS. Yes volatility swings are kicking in, credit spreads are widening but I personally don't think banks are on a hiring freeze. Apparently, job vacancies are aplenty though people have argued there aren't any, those posted on several websites are just hoaxes.

Back in Asia, it seems that many friends are switching jobs, and jobseekers are quick to secure offers. Market seems pretty hot right now, pay looks good, so I don't think markets are expected to see a sharp downturn.

Commodities seem to be the hottest asset class this year.

Week 7

Short hours last week, long hours this week. Well, I had to get pick up Delphi and get my codes working, so...
Well I didn't quite finish everything as I had hoped, but managed to get a significant part of it done.

I'll be moving to another desk on Monday, and had my presentation today. Somehow I got quite nervous this time round, I mean, everyone is bound to have some kind of anxiety when it comes to formal presentations, especially with directors assessing your performance. But I'm normally quite calm, at least I'll somehow manage to put up a relaxed front. Today I kinda stumbled on my words and was perhaps caught out in some pronunciations (c'mon I'm not a native speaker). But I could answer the questions and everyone told me I did well. Two directors told me, "well done", so I guess I have to take that as a positive sign. Or rather intepret it as, "well done...you screwed yourself". To be honest, I could have been much better in my explanation if I wasn't feeling so uncomfortable (yeah everyone says that ex-post).

Things are getting more competitive now, though we're (quant interns) still a pretty close group. We've been actively speculating on the number of vacancies and frankly I don't think everyone will be offered a job. Some desks have recently hired full-time analysts, though there could be vacancies in other offices. Spoke to my manager and he mentioned he could put me in touch with the HK office if I'm interested...probably that implies he's not taking me. But yeah HK wouldn't be a bad place to start with. And there's another director who visited us from NY, apparently he's looking to add a team member. Things are sort of hazy at the moment, not really sure what's gonna happen. But I guess at the end of it, even without a full-time job, I can look back and see how much I've learnt. I guess I'm already quite fortunate...there are tons of people outside looking in, hoping to get a taste of quant work.

Anyway, this week has been excellent. Met up with some friends, and had a cook-out last weekend actually. Probably gonna just chill out in the sun this weekend before starting on my last rotation. It's been quite an interesting summer.

Week 6

I don't know if it's just me...but time passes really quickly...and I mean real quick! Haven't really accomplished much in this rotation...spent quite a lot of time thinking about how I should model a certain feature of a traded instrument. Literally spending days sitting at my desk thinking. Well, at least I've talked to everyone on the team, and the head of the team actually spent an hour sharing his view and thoughts on the market with me.

When I attended IB presentations in 3Q last year, every bank said the same thing - they have a great working culture, people are willing to help, no cut-throat competition internally, etc. Of course I thought it was all bullshit, but for 6 weeks now, I have to say I haven't had any unpleasant experiences with the people there. Everyone seems genuinely helpful and happy with their work. Getting decent pay helps I suppose.

Had dinner with a friend who's interning with another IB just across the street. Haven't met up with anyone else from LSE since I started the internship. And btw, the Finance & Accounting dept at LSE have split up, so now there's officially an exclusive Finance dept.

Hmm, so what else happend in the week? The equity markets picked up a bit and then ended the week crashing again, the BoE did not raise interest rates as expected...and I left before 7pm everyday this week!

Ratings business

A lot of focus is placed on companies' credit ratings, and I wonder how much the relationship of a company and its assessor has on its final rating. I have a friend who worked in Moody's and lamented that they were quickly losing market share due to their less liberal view of credit scores in comparison to S&P. And it's a bit worrying to think of how things will change if the ratings model is flawed, but I guess we can't really tell. Changes in ratings will affect the company's stock price, corporate bonds, convertibles issued, etc...but to what extent?

Cheaper quants?

This article says that IBs are increasingly hiring cheaper quants and setting up their quant teams in regions like Eastern Europe and India. Well, from both an economic and a business perspective, it seems like the right thing to do. IT and quant talent are in high demand, and they're looking for people who can do the job...it doesn't necessarily mean you must be educated in top UK or US schools, where graduates have a high remuneration expectation. If you're hiring large numbers, especially fresh graduates, you can't really tell who's going to be the next Black or Derman, can you? Besides, by setting teams in these regions, they can be seen as expanding their investor base.

Quant is a sexy term, but it doesn't mean you create a model, implement it and the firm makes tons of money. Especially in an analyst role, you're involved in, typically, a small portion of model-building, perhaps working on a certain aspect of the model library. The stuff you learn in school are mostly textbook-based, and if you think you've managed to write VBA codes for all the pricing formulae in Hull, hopefully you are not too naive to think you'll be a successful quant.

For e.g., if you're pricing an exotic credit derivative, how do you model changing business cycles and credit levels? You make assumptions, a host of assumptions ranging from model-specific to macroeconomic ones. And with a short history to calibrate your model, your outputs and forecasts are, at best, wrong. I'm trying to say models are what they are, models. Being able to read the market is crucial, and how you make money is by coming up with the correct strategies, leveraging on your perception of future market movements.

I urge you to think about the finance intuition, the model assumptions and drawbacks, possible extensions and how your users, whether traders or external clients will use them, etc. Being a quant can very quickly become non-sexy, when you deal with the nitty-gritty stuff and spend weeks or months trying to decipher someone else's codes, when they have left for a higher position in another IB or a hedge fund.

Don't be afraid to voice out your ideas, but do plenty of research - while they will tell you that there are no stupid questions, opinions, etc...I'm sure you have on more than one occassion say to yourself...that's such a stupid question, what an idiot!

Week 5

It's week 5 already. Started a new project at another desk this week. Not what I expected, but it's still a rather demanding project, and I might have to learn a new programming language. Delphi, not VB or C++. Not sure if Delphi is a popular choice in the financial industry.

Day passes really quickly and I feel I haven't done much. Although we've been told that we're not directly competing against one another, we somehow feel that not all desks will have vacancies. We just had our mid-internship reviews and I think everyone did well. At least from the feedback we got.

The trading floor is simply amazing, wish I could spend some time with the traders, but everyone is incredibly busy. No chance of catching anyone, and you don't want to come across as being annoying, especially with the markets going down amid the credit and subprime woes.

5 more weeks to go...

Week 4

First desk rotation is over. Presented my project and I think it turned out alright. Had a couple of social events this week too, had a good time.

And I haven't stayed that late this week, I left at 6pm on two days. Finished my project on Thursday actually and had more time to talk to people and look at research reports on Friday.

Some of the interns are applying for other jobs at the same time, just in case they don't make the cut. I wonder if I should do the same...

Just got my pay check, and hardly been spending on anything. I guess that's why bankers are rich - they don't have time to spend. And the cafeteria is great, food is of high quality and it's subsidized by the firm. That leaves you with decent savings.

Btw, I can't blog about my project work other than mentioning it's on valuation/pricing. So contrary to what this blog is set up for, I have to say I was rather naive to think I could share with the public on my work without revealing my identity. Compliance is not something you'll want to take lightly, especially with the regulations in the financial industry. But I hope current and future MFE students and non-quants will still benefit from my postings. I'm happy to take any questions, but I guess the best place to start will be the Wilmott forum.

Week 3

The week passes so quickly that I hardly got much done. Apart from more coding and debugging, there were a few seminars and training sessions. Still haven't really settled in properly, and in a week's time I'll be moving on to another desk. You just got to work hard and fast. There's no point trying to impress people, because noone will be - everyone is smarter than you are.

I work 14 hours and eat at my desk. I take 4 coffee breaks a day. I hardly facebook or use IM anymore. I call NY (and receive calls from NY) more often than home. I spend more time on FT and Bloomberg than on my iPod.

<<<3 weeks back: I sleep 14 hours and eat 5 times a day. I drink fresh juices and milk only. I am always on facebook and MSN. I don't know the international calling code for US. I always tune into NBA.com, Soccernet and my iPod.

Oh, and on graduation night, I was in the office.

Week 2

A very different experience having a desk in a wide open floor plan. A VP and a Senior Director sit beside me. MDs walk around talking to people at all levels. Contrast this to my previous job where I was confined to my little enclosed cubicle, and my manager would call me (using his speaker phone) to march into his office for discussions.

Anyway, work has been quite interesting. Typical hours for me are from 8am to 9~10pm. Right now there's not much interaction with other research teams or sales and trading. Everyone is (acts) smart, confident and professional, and when they talk to clients they really sound like experts in their field. I'm quite impressed with the talent level in the organization.

Have to get used to waking up early. Haven't done much during this weekend, just trying to get some rest and spend time with my sister.

Days 3, 4 & 5: training and meeting with manager

Training ended today, overall, a good refresher and also understood some subtle points about certain instruments. Met up with my manager and we have scoped up an interesting pricing project. Lots of background reading though, which I'll probably start to flip through before Monday. Will be up in Leeds over the weekend.

Well, I still have to make a trip to Cambridge to visit a friend. Supposed to go last week but had farewell dinners with a few coursemates who have left London for good. I guess with my schedule it's gonna be quite hard to arrange a trip, besides, my Cambridge friend will be a father in 1 week! Congrats!

Apparently, the IBD interns will be starting work this Saturday instead of next Monday...well, I guess it's true that they'll be working very long hours...somewhere from 9am to 2am. Also, the equity research guys start at 7am before the traders come in.

Day 2: training

A much lighter day today. Had training on quant stuff, not hardcore math, but rather a crash course on financial instruments. Training will run through the end of the week before starting real work next Monday. Have yet to meet my line managers, but so far, all the senior people I've met are very friendly and down-to-earth. Even the 1st and 2nd year analysts are very helpful, offering advice and trying to make the transition easier for us. A very pleasant surprise indeed.

Day 1: network...network...network...

Met the rest of the quant interns...just a handful of us. Brilliant people. Basically today was just some formal firm intro stuff and a lot of networking...and networking. Most of the summer interns are from UK schools, with the rest coming from top US colleges (Harvard, MIT, Columbia, UPenn, UChicago, NYU, etc) and other European schools (Insead, IESE, ESSEC, etc). Those from UK are dominated by grads from Oxbridge, LSE and Imperial. Apparently competition is extremely intense this year...less than 3% of total applicants got offered a place. Wow...seems much more competitive than full-time positions.

A very tiring day...talking to people and remembering names are far more exhausting than exam revision. Anyway, that's the nature of the business - building relationships.

Calendar

Got my full internship calendar. I see a lot of social/networking events and technical and soft skills training. A couple more days to relax and do some preparation. Need to press my suits and iron my shirts/trousers, etc. Oh, and there are black tie events too, so I need to invest in a nice dinner jacket soon.

Some of my friends will be going to Amsterdam, Paris and NY for training for full-time positions. Others are on vacation in Prague, Vienna, Hvar, etc enjoying themselves. But I'm not complaining...I am anxious to start work...

After posting the link to my blog on GD, I've seen increased traffic...particularly from the States. I guess most of the people on GD are from US then. Btw, people are debating whether London has taken over NY as the world's no.1 financial center. Well, for one, London is getting more M&A deals and the London Stock Exchange is the leader for IPO markets (higher than NYSE and NASDAQ combined). Besides, seems like the average salary in London is about 10% higher than Wall St, but prices are soaring. In relative terms, could perhaps work out to be the same as NY or HK I assume.

From Quant to Riches

Finally found this article, thanks to Wallstyouth from the Quant Network forum.

Btw, there is an event "How I Became a Quant: Financial Engineers Give a Personal View of their Careers in Quantitative Finance", to be hosted by IAFE on 3rd Oct 2007 at Cass Business School, London.

No $

Hmm, just got in touch with the editor of eFinancialCareers. Apparently they can't pay intern diarists, but those who write will be given a "gift".

Btw, if you guys know of anyone blogging or any articles on IB internship experiences, do let me know (post the link in the comments box). Gracias.

AC402 Financial Risk Analysis

This is an optional module in which I have chosen to write a dissertation instead. Just submitted my paper today...so I guess that's the end of my 10 months at LSE, well, i.e., if I pass.
Spent about a week or so working on the dissertation, so I have to say it's not a great piece of work. But I've learnt quite a bit on my topic (credit spread puzzle), read at least a dozen journal articles, though my final paper did not have much original contribution.

Exactly a week from now, I'll be starting work. I'm sure there'll be more exciting posts to follow (only if you find IB and quant work exciting). Since I will be blogging on my internship experiences here, I'm thinking I might as well write for eFinancialCareers too, maybe I can pocket some extra money (I'm poor and London is way too expensive).

Saturation point

Tons of graduates are flocking into IB. An article claims that there are now about 150 applicants per job position in the industry. And more people are being lured into quant jobs as well. More and more academics are trying to make the switch, perhaps by the paycheck or lack of success in publishing research papers. The main point is, when will the industry hit saturation point? Will it be the case like the IT bubble?

Being a quant sounds sexy, doing high-level sophisticated modelling and applying advanced math skills. But it is common knowledge that a quant spends around 60-70% of his time writing codes, doing implementation work, etc. Some people say that it is not that sexy, and most models are much simpler than what is perceived.

There are so many quant finance programmes now, and the best brains go to top US schools. Look at Berkeley's student profile, and you see a lot of PhDs going back to school for a MFE, almost guaranteeing them a job in Wall Street. At the same time, London is looking more attractive and many US grads are applying to London. Competition is just too intense.

It is debatable whether to start work now and gain some experience, or to get a PhD and finish it in 3 years. Some argue that the experience will be more beneficial, while other claim having a PhD moves you up the food chain faster.

Sometimes I wonder when this quant obsession of mine will end, since if I were to move back home, I'd be unemployed. The local financial scene thrives on retail banking, and a growing niche in Islamic banking. Maybe I should be looking at Islamic finance, and could perhaps put myself in a better position.

Riskless curve

I read this paper by Longstaff, Mithal and Neis (2004) in which they find the choice of the riskless curve has a big impact on determining the components of credit spreads. Academics typically use US Government Treasury securities as the benchmark riskless rate, however, Longstaff et al. (2004) use the swap curve instead. They find, in contrast to many previous studies, that default risk in fact explains most of the variation in spreads.

Now this is interesting as it casts doubt on previous results. It could potentially be that previous studies, using swaps rate instead of Treasury rates, might find that default risk is the major determinant instead.

The question is, why is the swap curve a better proxy for the riskless curve? Hull et al. (2004) provide an argument, but I am not thoroughly convinced (at least not intuitively clear) that is the case. They also mention that practitioners also use the swap curve as the benchmark.

New book

New book to be released in July 07:
How I Became a Quant: Insights from 25 of Wall Street's Elite

Credit spreads

I'm currently working on my dissertation on the credit spread puzzle. Basically, there is a wide gap between corporate bond yields and expected default losses, which imply that default risks can only explain a small proportion of the spread. This is commonly known as the credit spread puzzle.

Well, I've been reading several recent research papers to summarize what the answers to this puzzle could be. This isn't the difficult part, what is difficult is being able to criticize the papers, undermine their models and justify my arguments. In a theoretical dissertation, we're supposed to select 8-12 journal articles and present them. Firstly, these articles have a certain level of technical sophistication, and I am unable to completely comprehend the modelling details. How am I going to succinctly criticize the models or suggest ways to improve them? Secondly, my knowledge on credit risk is probably close to nothing, and it'll take a huge effort to produce something outstanding (yeah, I know I should have started a few months back). And lastly, I have only a week left to finish it...

Anyway, in case you're interested in this area, which is still a major current research theme, I can provide you with a good reference list that I've been collecting for some time. A good paper to look at is Hull, Predescu and White (2004), where they mention the possible answers as tax and liqudity factors, risk premium, traders' expectations, nondiversifiable risks and diversifiable risks.

AC413 Fixed Income Markets

This is an optional module that covers fixed income market organization, introduction to interest-rate products, pricing and calibration using tree methods, Ho-Lee model, securitization, credit risk.

Exam went well this morning, as expected since half units are supposed to be easier. My first internship assignment will be on FI research, so I hope what I learnt will be useful. I've found a website with very useful materials ranging from products introduced by IBs to internal research papers. I wonder how the guy managed to get hold of the soft copies.

Anyway, exams are over, just have to complete my dissertation by 18th June. Even if I get distinctions for all my modules, it will not be enough to condone the exam I failed on Tuesday. One exam has a big impact and I spoke to DC (a premier HH, if you're in the city you should know him) about my career plans. Though his words were encouraging, it still doesn't change the fact that I have failed in my goal of attaining a distinction. Which leaves me to ponder what exactly went wrong...how could I fail a module which I like so much (and I had a distinction for my mocks).

On a merrier note, I'll be celebrating end of exams with my coursemates tomorrow. A very much needed one. I ought to stay out and enjoy the sun more often.

More ABN Amro

Haven't really been keeping abreast with market news recently. Here are some articles on ABN Amro. Go read if you're interested (I'm actually more concerned about the plight of the employees than anything else).
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due
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AC436 Financial Economics

There's a reason why at the outset they said this is the hardest exam you'll ever take in your life. It's true. To squeeze discrete and continuous time finance into one course isn't easy, but the programme committee managed to do so. It isn't the best idea in the world, but I thought it's good that in a 10-month Masters you get to see different facets of the subject itself. However, my exam went bad, awful. Catastrophic. I'm certain I'm gonna fail this one.

I normally keep a cool head when it comes to stress, especially exam stress. Today I lost it, I was flimpsy. Racing against time, and with such a large stake on the table, I lost miserably. Everything went wrong, I couldn't even get the trivial things right. 6 hours spent on a cheat sheet that was never really used. The only positive I can take away is that almost everyone felt the same way.

I'll like to believe on any other day I'll be able to do much better. They say one bad day can change your life forever. Coming off a big setback last year, this one comes next. While you may think failing a module isn't a big deal, but it is...to me. My confidence has taken a large knock, and I need to sit down and rethink my career plans.

I'm sure I'm good at this subject, but my grades will be a counterfact. So much so for all those talk of being a quant. It's hard to swallow this, but I'll just take this as a bad day. Just disappointed at myself, really. I'm a slave of my own ambitions.

ps. sorry you have to bear this shit with me and listen to me whine and moan.

HJM

I need a better intuition of the HJM framework. I understand that it is different from equilibrium models in that it takes the entire forward curve as given to price interest-rate derivatives. But I'm not really sure of the implementation aspects, like how to incorporate randomness such that we get level and steepness effects. You can introduce two brownian motions to do that, but how?

I can embed simple equilibrium models into the HJM framework mechanically, i.e. following the steps in standard texts (which is just tedious calculus and algebra). But I can't really see how this is done in practice.

Exam is one day away. This is by far the most interesting module. Have been trying to solve the problem sets and I have to say I enjoy doing them. Various scenarious, various approaches. And everything boils down to the FTAP, and either using PDE or Feynman-Kac to solve. But it's those little tricks to begin with that eludes you. Will have a horrid time during the 3-hour exam. Not sure if I can finish all 4 problems.

Counting down

I'm already counting down the days to my internship, even though I'm not done with my finals. Have a rough idea of what the internship assessment is like, but only having 3 weeks at each desk renders you little time to learn much. Then of course there's a lot of networking involved, across desks and divisions. But I can't wait to get started, been eagerly planning for years to have a go at this.

I've been living in a cave for most of the last month or so, since everyone's too busy preparing for exams. Getting bored of this, going through lecture notes and problem sets over and over again...to the point I tell myself, fuck it, I don't need a distinction, just need to pass. Yesterday the weather was too tempting and I went down to the Tuns to catch England vs Brazil. It's good to see Beckham back.

Anyway, with only 3 days left to the hardest exam (Financial Economics), I'm beginning to feel restless. In the past, many people have failed this module, and I'm wondering what will happen to me if don't graduate this July. It's a real concern to all of us...we don't even want to book tickets for the graduation ceremony just yet. I should be worried, but I'm not? But all the martingale, markovian, diffusion, Ito, BS, EMM, HJM appear when I'm sleeping.

Aleksey Vayner

He became the city's headline grabber for a week sometime late last year. Whilst we were all busy doing job applications and getting stressed out as a result, this wanker-banker wannabe gave us something to talk about besides hardcore company research and FT market news. In case you missed his heroics, check this out.

AC437 Financial Econometrics

This is another core module. The first part is taught together with the MSc Econ students, which covers classical econometric theory - linear regression, OLS, MME, MLE, GLS, IVE, hypothesis test framework, Wald, LR, LM, asymptotic theory. The second part focuses on applications to finance - random walk, event studies, CAPM, factor models, PV relations, volatility modelling, GMM.

The paper this morning was not too difficult, but I can kick myself now. I am embarassed to say that I got simple stuff wrong...calculation of power of a test! That's 10% gone! Shit happens. But I'm not the only duck, apparently many people got it wrong too. Other than that, I'll probably be penalised here and there for whatever reasons they might give. Hope I'll scrap through to get a distinction on this one, but not very confident either.

The next paper on Tue is gonna be a killer. The whole class is scared shit. And it happens to be the module I like most.

CAPM tests

Many tests have been carried out to determine if the CAPM holds. CAPM postulates that beta completely captures the cross-sectional variation of expected returns. Now, I am not convinced that this simple relationship can help to predict asset returns, and is evidenced by the many test results over the past few decades. Presence of irrational investors and other risk factors must be involved. Hence I wouldn't be interested in doing a test (but which I did several years back). What is surprising is the paper by Fama & French (1992, 1993), that including book-to-market and size as factors can in fact explain asset return variation better. It is also quite robust to different time periods. So much so as this is taken as the industry benchmark in comparing investment portfolios. But how do we intepret BM and size as risk factors? And are there other missing factors?

Why?

Questions that have been frequently thrown all over the place: Why...
1) does a quant need a PhD?
2) isn't a Masters enough, since in the long run, knowledge and industry experience count more than a PhD under your belt?
3) do banks like mathematicians and physicists?
4) must I graduate from the top universities?

See here for a discussion.

Desk allocations

Just got a confirmation on my desk allocations. I'll be rotating across fixed-income, equity derivatives and structured credit. Don't really know what to expect as I'm a green horn but I'm looking forward to learning new stuff. It'll be both stressful and enjoyable at the same time. Let's just hope everything turns out well and they won't send me packing. Oh boy, it's gonna be a long summer.
Anyway, there are other things to worry about at the moment - exams.

I'm still seething from the wrong options I chose. Damn. As usual, I could've done much better had I put in more effort. Never satisfied with my output anyway.

EC411 Microeconomics

This is a core module for MSc F&E, and it covers standard micro theory - consumer, producer, welfare, perfect competition, monopoly, oligopoly, product differentiation, game theory applications, signalling, bargaining and auctions. The structure of the exam is very much applied in nature, and questions "look" rather easy. But they can be extremely tricky, e.g. you don't see nice functions like CES or Cobb-Douglas. More often than not, you will have to solve for corner solutions rather than interior ones.

Sat for the paper this afternoon. I thought it was relatively harder compared to past years, but many people thought otherwise. Most of my classmates have an Econ background, so I guess it's easier for them (I didn't major in Econ). Besides, this is also a core module for the MSc Econ programme in arguably the most prestigious economics school outside of US (I see Oxbridgers shaking their heads in denial), so we have some of the best Econ students around (Vinayak calls them creme de la creme, but as in any programme, you have duds as well). Anyway, I was a little disoriented in a room filled with weirdos, and I skipped the game theory questions which requires more brain energy. In other words, I'm an airhead. I'm not sure if I chose the right options in part B of the paper. Not confident of a distinction grade for this one.

Oh well, 1 down, 4 to go.

Coin tossing game

This is a question posted in the Wilmott forum some time ago and has attracted considerable attention. It looks like a simple problem (but I don't think it is).

In a fair coin tossing game, your payoff is the number of heads divided by the number of tosses (i.e., m heads of N tosses give you $m/N). You can quit anytime. What is the fair price of playing this game? (fair means that the house breaks even in the long run).

Answer to problem posted in previous blog (22/05/07):
In period 2, player B proposes. If A rejects, both get 0. So B proposes 1 for himself (hence 0 for A), since either way A gets 0 (A is indifferent between the two). Discounted to period 1, B's proposal is d.
In anticipation of B's proposal, in period 1, A proposes 1-d since he has no incentive to give B more than d.
Hence optimal solution is (A,B) = (1-d,d)

Game theory

A simple game-theoretic model can provide insights to a problem. It is another tool used in the analysis of the interaction of players. Everyday life poses game theory problems, e.g. firms deciding whether to enter a particular industry, how companies set prices in view of the actions of competitors, how one responds to a given incentive or disincentive, etc.

My microeconomics exam is on this Friday. I have never liked this subject, and having lecturers like mine didn't further help the cause. Anyway, in preparation for the paper, I was forced to read up and found to my liking, the simple applications of game theory (though Nash equilibrium is an easy concept, the solutions can sometimes be a little illogical at first glance).

A simple problem:
Suppose there are 2 players (A and B) bargaining over a cake of size 1 in 2 periods. There is a common discount factor, d (if you have 1 in period 2, that means it is worth d in period 1).
In period 1, player A proposes a share x for himself (and hence 1-x for player B). If B accepts, the game ends, otherwise we go to period 2.
In period 2, B proposes a share y for himself. The game ends after period 2.
What are the optimal responses for both players?

ps. You should watch "A Beautiful Mind" if you haven't already done so. It's one of my all-time favourite films.

The battle over ABN Amro

There is heightened uncertainty in the air as the drama continues to unfold. Who will win the takeover battle? Barclays? RBS?
Fortis, RBS and Santander have submitted a proposal to acquire LaSalle (a subsidiary of ABN) when the proposed sale to Bank of America was put on hold.
Hugh Scott-Barrett has announced that he will step down as CFO. There are reports that customers are fleeing. Employees are uncertain about their future. It is believed that the retrenchment number will be close to 4500, with the technology group more probable to be highly affected. (An insider source revealed to me that ABN will pay a compensation worth of 2 years' pay to new employees if they are retrenched. I wonder if this is good news).

Barclays and RBS stock prices have fluctuated widely over the last 2 months, with the risk index increasing by 1.5 to 2 folds.
I am keen to grab hold of analyst reports on the predictive impact of this takeover. Any sources?

Consolidation in the financial industry has been going on for some time, following the trend from the US. As the financial landscape reshapes and giant conglomerates form, one wonders if there are efficiency gains or economies of scale and scope.
What are the consequences and future implications?

The Quintessential Quant

I happened to chance upon this article published in Business Week. Thinking of working for Renaissance Tech or DE Shaw?

ps. James Simons is the 2006 IAFE Financial Engineer of the Year .

All-rounder

In this increasingly competitive society, a myriad set of skills is essential, in fact a pre-requisite for a quant. And this doesn't guarantee success. Success is a combination of motivation, desire, diligence, entrepreneurship, innate talent and an element of luck.

Just to get to the starting point of the race, one needs to have an advanced degree. A working knowledge of stochastic calculus, probability theory, measure theory, statistical theory, programming and simulation, ODE, PDE, numerical analysis, real analysis, complex analysis, functional analysis, metric spaces, optimization theory.

Is it all about math? Scientific curiousity, good business acumen, excellent presentation skills, ability to intepret results, client-oriented and being a team player - all come into the equation.

You have to understand the dynamics of financial markets, the behaviour of assets, how to replicate them and structure new products, transcation costs and liquidity constraints, impact of uncertainty as well as legal, accounting, tax and regulatory implications among other issues.

Seems daunting isn't it? But I wouldn't know until I have had a taste of it.

On a separate note, I'll be making a trip to Cambridge after my exams to visit an old friend who has just completed his PhD and will be working as a quant in a top-tier IB. He might be able to provide more insights from his past internship experiences. I'm looking forward to that. And I'm starting work next month too, I'm so excited.

Good times?

A recent article posted on eFinancialCareers stated that this year has been exceptionally good in terms of job opportunities in the financial industry. I'm not sure how Morgan McKinley came up with the results, but it certainly didn't seem that easy.
My batch has experienced difficulties getting offers, though by now about 50% of the class should have found something. Certainly not 2 to 8 offers. How absurd.

Another article claimed that bonuses will increase. I certainly hope so. I need cash to finance my Hugo Boss and Armani suits, and Burberry, Gucci and LV accessories. Ok that's so not true.

Wrong decision?

Well, the MSc programme I am currently in isn't that rigorous you might say, and I can't agree any better. I had initally planned on applying to Financial Math/Financial Engineering programs in US for entry in 2007, but it didn't work out. I wanted a change of scenery so badly that I was too hasty in making the decision to apply for 2006 entry, and in the process of doing so, I missed out on almost all the deadlines for US schools. I only managed to apply to Columbia MAFN, NYU and UK schools.

Even then, with the offers I had, I chose LSE over the likes of Columbia, Imperial and Oxford. Though I have now landed a quant internship with a bulge bracket firm after convincing them I was good enough, the decision still stings somewhow. Right, so in LSE neither did I learn C++ nor Matlab, and the courses are not mathematical enough. Why the heck did I choose LSE then? Sadly, I lost focus along the way, and opted for an easier programme - no math proofs, no programming, just plain theory and applications.

I'm contemplating doing a PhD to have a good shot on becoming a quant, but my math skills aren't quite up there. My programming skills aren't up to par either, though I'm comfortable coding in Excel VBA. Perhaps I should just be content with the internship and work my way through.

I'll think about what I want to do when my exams are over. Over the next few weeks, I'll be blogging on my exams, and perhaps will write an article on "Surviving the MSc Finance and Economics at LSE", much in the spirit of what Vinayak has done for MSc Econ. Hopefully it'll prove useful for prospective applicants.

Demand for quants

From the pioneering work on modern financial economics by Harry Markowitz, William Sharpe and Merton Miller to the revolutionary Black-Scholes formula by Robert Merton, Fischer Black and Myron Scholes, coupled with the advent of rapid technological progress over the past decades, the financial industry has undergone vast changes in terms of complexity and innovation. There is now an ever increasing need for highly quantitative and numerate people - mathematicians, physicists and engineers to work at the forefront of financial markets.

For starters, refer to the following resources for a better definition and introduction to the role of a quant.

wikipedia
Mark Joshi (pdf)

The Beaver