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Computational finance
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<h2 id="history">History</h2> <p>The birth of computational finance as a discipline can be traced to <a href="/facts/Harry_Markowitz/IbJSA0Sf">Harry Markowitz</a> in the early 1950s. Markowitz conceived of the portfolio selection problem as an exercise in mean-variance optimization. This required more computer power than was available at the time, so he worked on useful algorithms for approximate solutions.<a class="footnote-ref" id="fnref:7" href="#fn:7"><sup>7</sup></a> Mathematical finance began with the same insight, but diverged by making simplifying assumptions to express relations in simple <a href="/facts/Closed-form_expression/y0xCXlSk">closed forms</a> that did not require sophisticated computer science to evaluate.<a class="footnote-ref" id="fnref:8" href="#fn:8"><sup>8</sup></a> </p><p>In the 1960s, hedge fund managers such as <a href="/facts/Edward_O._Thorp/07TeXLNx">Ed Thorp</a><a class="footnote-ref" id="fnref:9" href="#fn:9"><sup>9</sup></a> and <a href="/facts/Michael_Goodkin/dCGzAqch">Michael Goodkin</a> (working with Harry Markowitz, <a href="/facts/Paul_Samuelson/dIU1hb4B">Paul Samuelson</a> and <a href="/facts/Robert_C._Merton/pSzzkIvt">Robert C. Merton</a>)<a class="footnote-ref" id="fnref:10" href="#fn:10"><sup>10</sup></a> pioneered the use of computers in <a href="/facts/Arbitrage/sFFMI3nk">arbitrage</a> trading. In academics, sophisticated computer processing was needed by researchers such as <a href="/facts/Eugene_Fama/MnEI1W5m">Eugene Fama</a> in order to analyze large amounts of financial data in support of the <a href="/facts/Efficient-market_hypothesis/x7vvKokm">efficient-market hypothesis</a>.<a class="footnote-ref" id="fnref:11" href="#fn:11"><sup>11</sup></a> </p><p>During the 1970s, the main focus of computational finance shifted to <a href="/facts/Valuation_of_options/11Ft9oEA">options pricing</a> and analyzing <a href="/facts/Mortgage_loan/EtGHG9q3">mortgage</a> <a href="/facts/Securitization/MMc4JDM0">securitizations</a>.<a class="footnote-ref" id="fnref:12" href="#fn:12"><sup>12</sup></a> In the late 1970s and early 1980s, a group of young <a href="/facts/Quantitative_analyst/ozNLKatW">quantitative practitioners</a> who became known as "rocket scientists" arrived on <a href="/facts/Wall_Street/Xt5SxcCN">Wall Street</a> and brought along <a href="/facts/Personal_computer/koaYfNce">personal computers</a>. This led to an explosion of both the amount and variety of computational finance applications.<a class="footnote-ref" id="fnref:13" href="#fn:13"><sup>13</sup></a> Many of the new techniques came from <a href="/facts/Signal_processing/Npaja6zb">signal processing</a> and <a href="/facts/Natural_language_processing/1hjMKsSN">speech recognition</a> rather than traditional fields of <a href="/facts/Computational_economics/MgHm5lAS">computational economics</a> like <a href="/facts/Mathematical_optimization/oRn8Iv5I">optimization</a> and <a href="/facts/Time_series/fSXPR817">time series</a> analysis.<a class="footnote-ref" id="fnref:14" href="#fn:14"><sup>14</sup></a> </p><p>By the end of the 1980s, the winding down of the <a href="/facts/Cold_War/spJdJQ3q">Cold War</a> brought a large group of displaced <a href="/facts/Physicist/cQcgvSIm">physicists</a> and <a href="/facts/Applied_mathematics/qyqklXXm">applied mathematicians</a>, many from behind the <a href="/facts/Iron_Curtain/V19wsHct">Iron Curtain</a>, into finance. These people become known as "<a href="/facts/Financial_engineering/K43H6H28">financial engineers</a>" ("quant" is a term that includes both rocket scientists and financial engineers, as well as quantitative portfolio managers).<a class="footnote-ref" id="fnref:15" href="#fn:15"><sup>15</sup></a> This led to a second major extension of the range of computational methods used in finance, also a move away from personal computers to <a href="/facts/Mainframe_computer/nrBR6rWa">mainframes</a> and <a href="/facts/Supercomputer/HT9NwGAN">supercomputers</a>.<a class="footnote-ref" id="fnref:16" href="#fn:16"><sup>16</sup></a> Around this time computational finance became recognized as a distinct academic subfield. The first degree program in computational finance was offered by <a href="/facts/Carnegie_Mellon_University/XKd7L2KA">Carnegie Mellon University</a> in 1994.<a class="footnote-ref" id="fnref:17" href="#fn:17"><sup>17</sup></a> </p><p>Over the last 20 years, the field of computational finance has expanded into virtually every area of finance, and the demand for practitioners has grown dramatically.<a class="footnote-ref" id="fnref:18" href="#fn:18"><sup>18</sup></a> Moreover, many specialized companies have grown up to supply computational finance software and services.<a class="footnote-ref" id="fnref:19" href="#fn:19"><sup>19</sup></a> </p> <h2 id="applications-of-computational-finance">Applications of Computational Finance</h2> <ul><li><a href="/facts/Insurance/06VP8I3B">Insurance</a></li> <li><a href="/facts/Quantitative_investing/ozNLKatW">Quantitative investing</a></li></ul> <h2 id="see-also">See also</h2> <ul><li><a href="/facts/Outline_of_finance/pQFtoDwS">Outline of finance</a></li> <li><a href="/facts/Quantitative_analyst/ozNLKatW">Quantitative analyst</a></li> <li><a href="/facts/List_of_quantitative_analysts/KNkWUmFo">List of quantitative analysts</a></li> <li><a href="/facts/Mathematical_finance/P9otEltQ">Mathematical finance</a></li> <li><a href="/facts/Financial_engineering/K43H6H28">Financial engineering</a></li> <li><a href="/facts/Master_of_Computational_Finance/yjN2RR5X">Master of Computational Finance</a></li> <li><a href="/facts/Master_of_Quantitative_Finance/yjN2RR5X">Master of Quantitative Finance</a></li> <li><a href="/facts/Financial_reinsurance/xDQuXQjr">Financial reinsurance</a></li> <li><a href="/facts/Financial_modeling/Qhk0pV2W">Financial modeling</a></li></ul> <h2 id="external-links">External links</h2> <ul><li><a href="http://ieee-cis.org/technical/cfetc/">IEEE Computational Finance and Economics Technical Committee</a> <a href="https://web.archive.org/web/20120205215247/http://ieee-cis.org/technical/cfetc/">Archived</a> 2012-02-05 at the <a href="/facts/Wayback_Machine/nmQ3a6JC">Wayback Machine</a></li> <li><a href="http://www.scicom.uwaterloo.ca/~paforsyt/agon.pdf">An Introduction to Computational Finance without Agonizing Pain</a></li> <li><a href="http://www.bracil.net/finance/papers/TsangMartinez-CompFinance-Ieee_conneCtIonS2004.pdf">Introduction to Computational Finance, IEEE Computational Intelligence Society Newsletter, August 2004</a></li> <li><a href="https://web.archive.org/web/20060821114429/http://www.puc-rio.br/marco.ind/katia-num.html">Numerical Techniques for Options</a></li> <li><a href="https://web.archive.org/web/20060407205653/http://www.puc-rio.br/marco.ind/sim_stoc_proc.html">Monte Carlo Simulation of Stochastic Processes</a></li> <li><a href="http://www.essex.ac.uk/ccfea">Centre for Computational Finance and Economic Agents (CCFEA)</a> <a href="https://web.archive.org/web/20181215223200/http://www.essex.ac.uk/ccfea">Archived</a> 2018-12-15 at the <a href="/facts/Wayback_Machine/nmQ3a6JC">Wayback Machine</a></li> <li><a href="http://www.risk.net/type/technical-paper/source/journal-of-computational-finance/">The Journal of Computational Finance</a></li></ul> <h2 id="references">References</h2> <ol> <li id="fn:1"><p>Rüdiger U. Seydel, Tools for Computational Finance, Springer; 3rd edition (May 11, 2006) 978-3540279235 <a href="#fnref:1" class="footnote-back-ref">↩</a></p></li> <li id="fn:2"><p>"Computational Finance and Research Laboratory". University of Essex. Archived from the original on 2012-07-12. Retrieved 2012-07-21. <a href="https://web.archive.org/web/20120712015741/http://www.bracil.net/finance/" target="_blank">https://web.archive.org/web/20120712015741/http://www.bracil.net/finance/</a> <a href="#fnref:2" class="footnote-back-ref">↩</a></p></li> <li id="fn:3"><p>Cornelis A. Los, Computational Finance World Scientific Pub Co Inc (December 2000) ISBN 978-9810244972 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:3" class="footnote-back-ref">↩</a></p></li> <li id="fn:4"><p>Mario J. Miranda and Paul L. Fackler, Applied Computational Economics and Finance, The MIT Press (September 16, 2002) ISBN 978-0262134200 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:4" class="footnote-back-ref">↩</a></p></li> <li id="fn:5"><p>Omur Ugur, Introduction to Computational Finance, Imperial College Press (December 22, 2008) ISBN 978-1848161924 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:5" class="footnote-back-ref">↩</a></p></li> <li id="fn:6"><p>Jin-Chuan Duan, Wolfgang Karl Härdle and James E. Gentle (editors), Handbook of Computational Finance, Springer (October 25, 2011) ISBN 978-3642172533 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:6" class="footnote-back-ref">↩</a></p></li> <li id="fn:7"><p>Harry M. Markowitz, Portfolio Selection: Efficient Diversification of Investments, Wiley, second edition (September 3, 1991) 978-1557861085 <a href="#fnref:7" class="footnote-back-ref">↩</a></p></li> <li id="fn:8"><p>Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, HarperBusiness (June 9, 2009) ISBN 978-0060598990 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:8" class="footnote-back-ref">↩</a></p></li> <li id="fn:9"><p>William Poundstone, Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street, Hill and Wang (September 19, 2006) ISBN 978-0809045990 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:9" class="footnote-back-ref">↩</a></p></li> <li id="fn:10"><p>Michael Goodkin, The Wrong Answer Faster: The Inside Story of Making the Machine that Trades Trillions, Wiley, (February 21, 2012) ISBN 978-1118133408 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:10" class="footnote-back-ref">↩</a></p></li> <li id="fn:11"><p>Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, HarperBusiness (June 9, 2009) ISBN 978-0060598990 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:11" class="footnote-back-ref">↩</a></p></li> <li id="fn:12"><p>Aaron Brown, Red-Blooded Risk: The Secret History of Wall Street, Wiley (October 11, 2011) ISBN 978-1118043868 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:12" class="footnote-back-ref">↩</a></p></li> <li id="fn:13"><p>John F. Ehlers, Rocket Science for Traders, Wiley (July 20, 2001) ISBN 978-0471405672 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:13" class="footnote-back-ref">↩</a></p></li> <li id="fn:14"><p>John F. Ehlers, Rocket Science for Traders, Wiley (July 20, 2001) ISBN 978-0471405672 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:14" class="footnote-back-ref">↩</a></p></li> <li id="fn:15"><p>Aaron Brown, The Poker Face of Wall Street, Wiley (March 31, 2006) 978-0470127315 <a href="#fnref:15" class="footnote-back-ref">↩</a></p></li> <li id="fn:16"><p>Aaron Brown, Red-Blooded Risk: The Secret History of Wall Street, Wiley (October 11, 2011) ISBN 978-1118043868 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:16" class="footnote-back-ref">↩</a></p></li> <li id="fn:17"><p>"Center for Computational Finance". Carnegie Mellon University. Retrieved 2012-07-21. <a href="http://www.math.cmu.edu/CCF/index.html" target="_blank">http://www.math.cmu.edu/CCF/index.html</a> <a href="#fnref:17" class="footnote-back-ref">↩</a></p></li> <li id="fn:18"><p>Rüdiger U. Seydel, Tools for Computational Finance, Springer; 3rd edition (May 11, 2006) 978-3540279235 <a href="#fnref:18" class="footnote-back-ref">↩</a></p></li> <li id="fn:19"><p>Michael Goodkin, The Wrong Answer Faster: The Inside Story of Making the Machine that Trades Trillions, Wiley, (February 21, 2012) ISBN 978-1118133408 <a href="/wiki/ISBN_(identifier)" target="_blank">/wiki/ISBN_(identifier)</a> <a href="#fnref:19" class="footnote-back-ref">↩</a></p></li> </ol>