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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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.