Quantitative Finance - Art or Science?

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Implications for Financial Risk Management• How it is• ... and how it should be• Mathematical models are used to quantify risks– the math is right; the problem is that it does notdescribe the real world in a quantitative way• Mathematical models should help to understand risks– the math is right & it should help us to describe the realworld in a qualitative way• Risk management decisions are delegated tomathematical models & judgment cast aside• Risk management decisions should be based onjudgment & mathematical model insights5
Implications for Financial Risk Management cont'd• How it is•... and how it should be• The principle of "No free lunch" is repeatedlyignored resulting in significant losses– Amplified Mortgage Portfolio Super Senior trades– Negative Basis Trades• As a risk manager never accept trades generating"risk free" profits– End of 2007 AMPS contributed 67% and NBT10% of UBS total Super Senior losses• Dig into details before the big picture isunderstood• Understand the big picture before you dig into thedetails6
Page 1 and 2: Quantitative Finance - Art orScienc
Page 3 and 4: Characteristics of Quantitative Sci
Page 5: Science and ArtUniversal Law of Gra
Page 9 and 10: Key Benefits of Financial Models•
Page 11: How does the big picture look like:

Quantitative Finance - Art or Science?

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