Principles of Quantitative Development

10.2 FURTHER READING

10.2.1 Quantitative finance

The main entry barrier for a quantitative professional with a nonfinance background, when he ventures into the intriguing world of options and derivatives, is one of argot. The language used in quantitative finance is so different and the jargon so profuse that his foray looks like a daunting task. However, this difficulty is only on the surface. The mathematical and quantitative aspects, though exacting and full of painstaking details, are not intrinsically difficult, but the new campaigner has to cut through the large amount of jargon and verbiage before getting to it. He can find help in the right kind of introductory books.

Big Picture 10.1: Effect of Modelling on Models

Mathematical finance is built on a couple of assumptions. The most fundamental of them is the one on market efficiency. It states that the market prices every asset fairly, and the prices contain all the information available in the market. In other words, you cannot glean any more information by doing any research or technical analysis, or indeed any modelling. If this assumption does not pan out, then the quant edifice we build on top of it will crumble. Some may even say that it did crumble in 2008.

We know that this assumption is not quite right. If it was, there would not be any transient arbitrage opportunities. Even at a more fundamental level, the assumption has shaky justification. The reason that the market is efficient is that the practitioners take ...