Jun

13

MLThe Practitioners, The Quant and The Nobel Prize were the speakers at todays finale of the NasdaqOMX Derivatives Week in Stockholm. You probably know them better as Denise Hubbard (20 year options trading veteran from the Chicago trading floors, that has traded for Dean Witter among others), Dr. Espen Haug (expert on derivatives, serial book writer on options and former trader for JP Morgan and several hedge funds), Dr. Emanuel Derman (of "My life as a Quant" fame, co-developer of the Black-Derman-Toy interest rate model, and former Managing Director of Goldman Sachs), and of course Dr. William F. Sharpe (winner of 'The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 1990', and the STANCO 25 Professor of Finance, Emeritus, at Stanford University's Graduate School of Business.

Dr. Haug started the day by talking about fat tails, past, present and future. Among the most interesting part of his speech was his alluding to having in the drawer some theories on new distributions and implications for option trading. But he didn't go further on the record but said that he would probably write a bit about in on Wilmott. His gave a very good speech, so I for one will definitely be on the lookout for his findings.

Denise Hubbard. It is always gratifying when somebody of great practical experience shares their best do's and dont's. Ms Hubbard shared from a wealth of knowledge in a speech called "School of hard knocks - lessons from the trading floor". Great advice mixed into funny stories from the floor, and off, since she has made a successful transition off the floor and trades from the screen nowadays. "When 'extraordinary popular delusions and the madness of crowds' takes over, mathematical models go out the window" was one of her rules which she then expanded on. Reminded me of Chair quoting Aubrey "never mind the maneuvers, just go straight at them".

Dr. Emanuel Derman came across just as unassuming and nice as I thought he would be from reading his book. Funny too. His speech drew on some material from the book and was about valuations and its discontents. A lot about the failure of models. He concluded with some thoughts on the right way to use financial models and one quote that stuck with me was: "use vulgar variables but in a sophisticated way". I take it to mean that one can get much mileage from quite simple tools or models, as long as one put a lot of thought into HOW to use them.

Finally, and the grand finale, Dr. William F. Sharpe talked about asset allocation looked at from a bigger perspective than mean/variance optimization. The gist of the speech was that if people really just care about those two measures, then fine, mean and variance is good enough. But people usually have more wants and needs. By getting them specified you can draw up utility functions and use them as a basis for the asset allocation (very simplified by this correspondent). Very interesting speech, and it will be interesting to see if this will have any effect on how endowments and pension funds, for example, actually allocates money. There was actually one in the audience*, that had the audacity to ask Dr. Sharpe if there was any interest from practitioners, and if the new model is being used/will be used. He said that it was too early to say, but at least the article had won a prize, so there was at least hope. (*yes you are right, it was this spec list correspondent that asked the question….what can I say, they gave away a baseball cap to the first in the audience that asked a question so I had to spit something out)

All in all, a very interesting day, which ended with drinks and horse divorce, and all smiles (excuse the pun).


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  1. David Whitesel on June 15, 2008 12:16 pm

    If derivatives are mainly concerned with thier ability to transfer microscale risk fluctuations onto macroscale uncertainty, there are a wide range of problems associated long term viable derivative structures, precisely because of the complex variables of the macrosystem enviroment of the time shape differentials of capital stocks, makes for a difficult task of imposition of micro scale onto macro scale due to certain limitations in the macro scale targets ability to accept in a self organizing sense, the offloading of risk.

    the question is, what derivatives are becoming, and that will be determined by the feedback from macro systems themselves, once the playing fields microscale inputs onto the macroscale are identified.

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