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From Physics To Finance: Piotr Karasinski Global Head of Quantitative Development, HSBC
From Physics To Finance: Piotr Karasinski Global Head of Quantitative Development, HSBC
Piotr Karasinski
Global Head of Quantitative Development, HSBC
Email: piotr.karasinski@hsbcib.com
Physics versus Finance
Physics:
– We believe in the existence of universal eternal fundamental
laws, written in the language of mathematics, that can explain
the physical world.
Finance:
– Past performance is not a guarantee of future performance
– Models create markets and shape the way market participants
think and act. Their use influences market behaviour.
– According to George Soros’s reflexivity theory people’s biases
and actions can affect the direction of the underlying economy.
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HOW I ENDED UP ON WALL STREET?
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How I Got into Finance
• In late May 1984, while in my last year of physics PhD studies at Yale, I ran into a Yale physics
friend, wearing the traditional graduation gown and accompanied by his whole family. He worked
somewhere in New York and came to Yale to attend his PhD graduation.
• I said “Tom, could you help me find a job in New York”. “Would you like to trade gold options?”
he replied. I knew what gold was, had no idea what the word option meant but was desperate to
get a job, any job! Having nothing to lose I immediately exclaimed “I would love to”.
• Tom called me a week later saying that his boss, head of trading at commodity trading firm
Mocatta Metals, was looking to hire somebody like me. I went to NY a couple of days later for an
interview and got hired. Tom’s boss had an applied math PhD from Courant Institute. Mocatta
Metals was run by its founder Yale psychiatry professor Henry Jarecki.
• I knew nothing about finance, let alone about option pricing (the term derivatives did not exist in
1984). I learned the whole field on the job by working on projects and through my own readings.
What made a big difference was that in April 1987 I moved to Goldman Sachs where I was hired
by Fischer Black. I got the interview through a Mocatta Metals friend who knew a member of
Fischer’s quant team.
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Why Physics?
• Reading “Biography of Physics” by George Gamov was the tipping point. I was
particularly taken by the human drama behind the process of discovery. I found this
book on the for-sale shelf, selling for something like 10 cents, in a scientific book
store in Warsaw.
• Fascination with the idea that you can discover the ultimate laws of nature doing
table-top experiments and capture the results through mathematics lead me to study
physics at Warsaw University followed by doctoral studies at Yale.
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Why Finance?
• I found in finance what I was looking for in physics: the ability to combine
intellectual thought and practical action. I enjoy the interdisciplinary nature
of the practice of finance in a global bank.
• The desire for commercial success might be in my DNA. My father ran his
own small manufacturing business in Warsaw so I grew up with, and was
fascinated by, the commercial side of life.
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A FEW WORDS OF WISDOM
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What You Need for Business Success
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Good Sense in Seeking Truth in the Sciences
Good sense is, of all things among men, the most equally distributed; for every
one thinks himself so abundantly provided with it, that those even who are the
most difficult to satisfy in everything else, do not usually desire a larger
measure of this quality than they already possess. And in this it is not likely
that all are mistaken the conviction is rather to be held as testifying that the
power of judging aright and of distinguishing truth from error, which is properly
what is called good sense or reason, is by nature equal in all men; and that
the diversity of our opinions, consequently, does not arise from some being
endowed with a larger share of reason than others, but solely from this, that we
conduct our thoughts along different ways, and do not fix our attention on the
same objects. For to be possessed of a vigorous mind is not enough; the
prime requisite is rightly to apply it. The greatest minds, as they are capable of
the highest excellences, are open likewise to the greatest aberrations; and
those who travel very slowly may yet make far greater progress, provided they
keep always to the straight road, than those who, while they run, forsake it.
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Advice from Freeman Dyson
The following piece of wisdom from Freeman Dyson is highly relevant when
moving from maths/physics into finance.
“I gazed at the stars as a young boy,” he once wrote. “That’s what science
means to me. It’s not theories about stars; it’s the actual stars that count.”
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MOVING TO FINANCE: KEY FACTS
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Jobs in Finance
• Business:
– Trader
– Structurer/Marketer
– Strategist
• Quant/IT:
– Quant in a front-office group
– Quant developer
– Quant in a control function: model validation, product control,
market/credit risk management
– Software developer
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Types of Derivative Financial Products
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What Do Quants Do?
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What We Are Looking For?
• People who enjoy solving problems that involve finance, maths, computation
and software development in an interdisciplinary dynamic environment.
• Skills/Qualities:
– Common sense
– High level of energy and enthusiasm
– Communication/interpersonal
– Ability to work in a team environment
– Maths (with special emphasis on probability and stochastics)
– Computing
– Programming: C++, C#, Java, VBA/EXCEL, Matlab, Splus/R
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Computational Techniques
• Direct numerical integration, linear algebra (eigensystems)
• PDEs
– Crank-Nicholson in one dimension
– ADI in two and three dimensions (Crank-Nicholson for each dimension)
– Up/Down winding
– Various techniques for dealing with discontinuities (Rannacher time-stepping, etc.)
– Smoothing boundary conditions
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Probability/Statistics and Stochastics
• Probability/Statistics:
– One and multi dimensional normal distribution: need to know inside-out
– Poisson distribution
– Concepts: mean/median value, variance/covariance, skew, kurtosis, leptokurtic (fat-tailed),
biased/unbiased estimator, sampling distribution for an estimator, Fisher transformation
applied to correlation estimation
• Stochastics:
– Markov chains
– Poisson processes
– Wiener process, arithmetic and geometric Brownian motions
– Gaussian mean-reverting, Ornstein-Uhlenbeck, process and its properties
– Kolmogorov forward (Fokker-Planck)/backward equation
– Stochastic calculus: Ito’s lemma, Girsanov’s theorem
– Monte-Carlo simulation of stochastic processes (start with Ornstein-Uhlenbeck)
– Concepts: mean-reversion, auto/cross-correlation, drift, volatility, stochastic volatility,
estimation of volatilities/correlations
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Basic Finance Knowledge
• Basic facts about stocks, bonds, call/put options, interest rates, inflation:
– Interest rates:
• time value of money
• compounding of interest
• short-rate (continuously compounded instantaneous interest rate)
• interbank rate (LIBOR), yields on government and corporate bonds with standard
maturities (typically 5 and 10 years), interest rate swap rates
• real and nominal rate, inflation
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Models to Read About
• Black-Scholes model
– Derive the Black-Scholes PDE using Ito lemma and riskless
hedge argument
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BOOKS, MAGAZINES AND ARTICLES
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Books
General Interest
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Books (continued)
Other
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Articles and Magazines
Articles
• Risk www.risk.net
• Financial Analyst Journal www.cfapubs.org/loi/faj?cookieSet=1
• Wilmott www.wilmott.com
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