A Stylized History of Quantitative Finance – Emanuel Derman comes home

The African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town (UCT) hosted a Special Seminar in October with Professor Emanuel Derman from Columbia University. Students attending the seminar had the rare opportunity to engage with the South African-born academic, UCT graduate, quant and author during a talk entitled A Stylized History of Quantitative Finance.

The seminar focussed on the historical progress of Quantitative Finance and how the industry has developed in terms of quantifying the concepts of diffusion, risk, volatility, diversification, hedging, replication and arbitrage; and their impact on valuing financial securities.

Professor David Taylor, Director of AIFMRM, said it was an honour for the institute to host someone with such a distinguished profile. “The combination of his academic and applied contributions to Quantitative Finance and his years of senior practical experience is rare. Emanuel’s visit is a clear signal to our students and the wider community that we have an international profile in Quantitative Finance at UCT. Also, he’s a UCT alumnus, which made this a sort of homecoming for him.”

Students at the event said it was the best seminar they had attended this year. “I think this is because Emanuel now gives seminars where he demonstrates the evolution of Quant Finance over the past four decades and, consequently, has many personal anecdotes to share. He has also become rather philosophical about the subject area and profession, which lends an unusual slant to his talks. However, because he teaches on the Financial Engineering programme at Columbia University, he still has access to the latest trends in research and practice”, said Taylor.

Prof Derman obtained a BSc Honours from UCT, followed by a PhD in Theoretical Physics from Columbia in 1973. He joined Goldman Sachs’ Fixed Income division in the 1980’s where he was one of the co-developers of the Black–Derman–Toy interest-rate model and the Derman-Kani stochastic volatility model. He is the author of numerous technical papers in Quantitative Finance primarily on the topics of Volatility and Financial Modelling.

He was named the IAFE/SunGard Financial Engineer of the Year in 2000 and was elected to the Risk Hall of Fame in 2002. Well-known as a professional Quantitative Analyst, Derman is also the author of the book My Life as a Quant: Reflections on Physics and Finance, which was one of Business Week’s top ten books in 2004.

Three specialised degrees empower sought-after graduates in financial services

For anyone wanting an exceptional career in the financial services sector, the African Institute of Financial Markets and Risk Management (AIFMRM) in the Faculty of Commerce at UCT has developed something of a reputation as the go-to place.

“Financial services is an innovative and dynamic industry, and our graduates are highly sought-after,” says Professor David Taylor, director of the Institute. “The demand is partly because they are ready for the world of work the day they walk into their new job.”

Speaking at AIFMRM’s careers fair at the beginning of the second semester at UCT, Professor Taylor stressed the intense, practical nature of the Institute’s specialised degrees. “These Master’s degrees certainly don’t follow what we jokingly refer to as the CPF model – cram, pass, forget. The programmes offer advanced specialist skills that equip graduates to perform in all areas of the financial services industry – and lead to successful, productive careers.”

Established just four years ago, AIFMRM offers three postgraduate degrees: an MCom in Risk Management of Financial Markets, an MPhil specialising in Mathematical Finance, and an MPhil specialising in Financial Technology – all of which were developed in association with industry and as a response to skills gaps in industry.

Admission for all programmes is highly competitive, with a minimum requirement of an Honours or four-year equivalent degree. Professor Co-Pierre Georg says, “We usually have over 600 applicants, but only select 60 in total for the three degrees. However, this should not discourage students from applying. We look at each applicant individually. Their academic record is important, but marks are not the only screening mechanism – we assess each person on their context and what they can contribute.”

The Institute emphasises entrepreneurial thinking and diversity in student selection. “We value entrepreneurship and anyone who is trying to make the world a better place – our focus is not only on getting graduates jobs but on empowering graduates to create jobs,” says Georg.

He adds that it is essential to understand the diversity of South African society in order to build products for South Africans. For prospective students, this includes diversity across background, gender and area of undergraduate study. Students from the faculties of science, commerce and engineering often make successful transitions to finance, he says.

Obeid Mahomed, a lecturer at AIFMRM, addressed the question of whether the choice of each of the three degrees limits graduates to specific areas within the financial industry. “Everything is possible, and nothing is compulsory or limited,” he says. “It depends on your passion and interests. Graduates from all three degrees fit in everywhere in the industry and they may move from one role to another fluidly.”

Mahomed outlined the skills needs of the financial services industry and highlighted that graduates are equipped to perform well in all facets, including government and regulatory bodies; financial services encompassing banking, insurance and savings; broking; consulting; corporate finance; private equity and FinTech.

The careers evening included a panel of current and former students who gave insight into their experiences. Katlego Kopeledi says his AIFMRM degree led to a marked shift in his thinking. “The difference between my undergraduate finance degree and my Master’s is that now my understanding has evolved to a point where I can explain complex things in a clear and simple way. I can sit down with managers and talk through their portfolios.”

Prospective students asked questions around how those from different academic backgrounds had coped with the change to studying finance. Andrea Pearse, a current MCom student, studied mechanical engineering as her undergrad degree. She says, “The maths from engineering certainly helped, but what is more important is that as an engineer you can think logically and creatively. The MCom will teach you to think differently and to problem solve, which is a huge advantage.”

UCT’s new MOOC makes fintech more accessible

UCT has launched a Massive Open Online Course (MOOC) examining the rise of fintech companies, the technology that enabled them and the regulation needed in an emerging market environment. The four-week course is being offered on Coursera, an online learning platform, which has 33 million users.

Dr Co-Pierre Georg, Associate Professor at the African Institute of Financial Markets and Risk Management (AIFMRM), teaches the course. He feels it aligns with AIFMRM’s aims of equipping people with the necessary skills to make meaningful contributions to the financial industry. “We asked ourselves how we could make fintech inclusive, how this knowledge regarding a new area of industry can work for everyone – not just the early adopters. This is what drove us to develop the MOOC. We want to provide education around the topic for South Africa and the world,” he says.

The nature of a MOOC is such that it makes education available to a broader audience, according to Associate Professor Georg. Participants can study in their own time without having to travel to a university to attend lectures or write exams.

AIFMRM is a postgraduate teaching and research institute and is part of the Faculty of Commerce at UCT. It focuses on quantitative finance, risk management and financial technology offering three Master’s degrees and several online short courses directed at working professionals. The MOOC is a collaborative effort between AIFMRM and UCT’s Centre for Innovation in Learning and Teaching (CILT).

Speaking at the launch of the MOOC, CILT Director Laura Czerniewicz said, “Coursera had a call for proposals in fintech, and we are honoured to have been chosen to work in this area. We had something original to contribute in terms of emerging markets. This MOOC is an ideal way to engage with fast-movers and new developments in the industry. It offers an intense, short, flexible way of getting to grips with a new field.”

UCT’s course titled Financial regulation in emerging markets and the rise of fintech companies is open to everyone, there are no entry requirements – just an interest in this exciting field. Financial aid is available to cover the cost of the course.

“It will be of benefit to students, entrepreneurs, professionals in the financial services or fintech industries and anyone who wants to join the trailblazers and movers and shakers in the fintech revolution,” says Associate Professor Georg.

The course analyses the causes and repercussions of major financial crises such as the great depression of 1929 and the global crisis of 2008. It also explains new technologies, including blockchain, which have fuelled the emergence of fintech companies around the world. Participants will gain insight into the new regulatory environment, globally and in emerging markets.

According to Dr Sumarie Roodt, Senior Lecturer in the Department of Information Systems at UCT and Chairperson of the Silicon Cape Initiative, blockchain is the next big leap for the African continent. She says, “even though 94% of all transactions in Africa are cash-based, there has been a rapid adoption of fintech in communities that aren’t necessarily financially literate. Blockchain has many different applications across a wide range of industries, especially for verification processes. It can be used to verify land transactions by providing a fraud-proof registry and could improve governance by making transactions more transparent.”

Monica Singer, from the incubator Consensys, encourages entrepreneurs and innovative thinkers to get involved and learn about this new field. She says, “you don’t need to be an expert to change the world! If you believe in something, and you have an exciting idea then follow your instinct – just do it! Blockchain will change everything – the future is here. Get involved.”

Coffee, collaboration and curiosity in the pursuit of research

The African Institute of Financial Markets and Risk Management (AIFMRM), a postgraduate institute in the Faculty of Commerce at the University of Cape Town (UCT), hosted two pioneering events in July – the much anticipated fifth edition of the annual Financial Mathematics Team Challenge, and a new, intensive research collaboration called, The Factory. Both events are designed to boost the culture of research in the university by nurturing a new generation of scholars.

“We consider research to be the vehicle for everything that we do,” says Professor David Taylor, Director of AIFMRM.

AIFMRM is a postgraduate teaching and research facility that drives investigation through inviting debate, discussion and collaboration on industry-relevant issues. In so doing, it aspires to develop the next generation of African academics dedicated to rigorous, finance-related research.

“There is a skills shortage in the financial industry, and of course Bachelors graduates get scooped up after graduation as they are a rare resource. However, this means that talented students may not continue their studies. Taking a long-term view, if we lose potential Master’s and PhD students, then ultimately who will be the researchers and lecturers of the future?” asks Dr Andrea Macrina, Director of the Financial Mathematics Programme at University College London (UCL) and Adjunct Associate Professor in AIFMRM.

AIFMRM endeavours to nurture this precious chain of educators and foster South African intellectual capital by exposing students to the value of research through experience.

The institute has pioneered two initiatives to engage talented, hard-working students in research. The first of these is the annual Financial Mathematics Team Challenge (FMTC), jointly hosted by AIFMRM and UCL, and co-created by Professor Taylor and Dr Macrina.

During the FMTC, teams of postgraduate students have seven days to solve problems posed by either academics or industry practitioners. Each problem has mathematical, computational and theoretical components, and includes analysis of real-world data. Teams are made up of local and international students at Master’s and PhD level. According to Dr Macrina, this mix is exceptionally beneficial because it removes prejudice and assumption, and leads to genuine collaboration based on respect, contribution and peer-learning.

Now in its fifth iteration, the FMTC has borne great success and achieves a high level of output from the students. “The work achieved in this time frame is equivalent to a Master’s dissertation, and many of the challenges have gone on to inspire research publications,” says Professor Taylor. He adds that “not once has a team failed to solve their problem.” This year, three of UCT’s Quantitative Finance PhD graduates were previous FMTC participants. “We have witnessed the depth of their development,” says Dr Macrina, “and this speaks to the deeper challenge of transformation – home-grown academics are integral to the development and transformation of South Africa.”

A testament to the FMTC’s success is that it will be replicated in Brazil in August this year. AIFMRM has been exploring how to apply this blueprint elsewhere for some time. A previous participant of the challenge, a Brazilian PhD graduate from UCL, was so inspired by the effect of the FMTC on young South Africans that he leapt at the chance to do the same in Brazil. A delegation from UCT and UCL will be travelling to Rio to serve as mentors.

The success of the FMTC motivated the second of AIFMRM’s research initiatives. The Factory, piloted in Cape Town from the 2nd to the 13th of July, is an innovative research exercise during which teams work intensively over 10 days to produce academic articles of a standard that can be submitted for publication in leading, peer-reviewed scientific journals.

“As far as I know, this is the first time a project like this has been attempted. There is nothing quite like it elsewhere,” says Dr Macrina. He adds, “I thrive on collaboration.”

The Factory first assembled and then supported teams of researchers, which included a mix of local and international participants across various stages of their careers, to collaborate on a paper, thus facilitating the transmission of skills and creating lasting networks across the scientific community.

Dr Macrina explains that a passion for research and genuine curiosity is what binds the teams. “They have been collaborating across the globe via Skype and email for the last six months and are meeting at The Factory to complete a draft of their paper.”

The Factory brought in an expert reviewer to help both teams improve the quality of their work during the process and thereby increase their chances of publication. Dr Marc Henrard, Head of Quantitative Research at OpenGamma and visiting professor at UCL, provided two rounds of expert scrutiny and feedback to the teams.

Completing an academic paper in such a short time frame is a Herculean task. When asked how participants fared under such intense conditions, Dr Macrina laughs and says, “Well, we bought a very nice coffee machine beforehand.” Both he and Professor Taylor have high hopes for the process and look forward to seeing the final papers in print.

Innovative programme aims to boost local capacity in research

Teams of Financial Mathematics researchers from as far afield as Australia, England and Denmark arrived in Cape Town on the 2nd of July for an intensive academic collaboration. The programme, dubbed The Factory, is unique in its aim to produce academic papers of a standard that can be submitted for publication in leading peer-reviewed scientific journals within just ten days.

“This is the only time a programme like this has been attempted, and as far as I know, there is nothing else quite like this elsewhere,” says Dr Andrea Macrina, Reader in Mathematics and Director of the Financial Mathematics Programme at University College London (UCL) and Adjunct Associate Professor in AIFMRM at UCT.

The Factory is the creation of Dr Macrina and Professor David Taylor, Director of the African Institute of Financial Markets and Risk Management in the Faculty of Commerce at UCT. “This initiative furthers AIFMRM’s aims of deepening skills capabilities in the financial industry, driving research and developing the next generation of African academics in the field,” says Professor Taylor.

Six months ago, The Factory began assembling, and supporting teams of international researchers combine their expertise and experience in collaborative academic research. Teams worked via email and Skype and then arrived at The Factory to tackle the complex outstanding issues requiring many hours on end in front of a whiteboard. The goal was to complete a draft of their papers in just ten days – a difficult task which would usually stretch over months.

The two Factory teams included a mix of international and local academics. “We combined researchers across different stages of their careers – from PhD students to those with five years of experience, to some with ten or more years in an established research career – to facilitate skills transfer through collaboration,” says Dr Macrina.

An essential element is that both teams included at least one young South African researcher to expose local scientists to condensed, academic and industry-specific research in a hands-on environment.

The Factory brought in an expert reviewer, Dr Marc Henrard, to help both teams improve the quality of their work and increase their chances of publication. Dr Henrard is Head of Quantitative Research at OpenGamma and a visiting professor at UCL. He regularly publishes work in international journals and is a frequent speaker at academic and practitioner conferences. He provided two rounds of scrutiny and feedback to the teams.

Professor Henrard’s research focuses on interest rate modelling, risk management and market infrastructure, which is within the scope of both papers being written at The Factory. He says, “What is important about this initiative is that The Factory teams are answering questions that practitioners in the field would really like answers to.”

“Factory participants posed the right questions – taking a particular problem in the market and thoroughly examining the fundamentals that no-one has taken the time to do properly. This dedicated research will give the industry the building blocks to work on, for example, when it comes to setting the interest rate for mortgages,” says Dr Henrard.

Dr Henrard commended the work that AIFMRM is doing to boost local research capacity and answer tough questions. “I am impressed by all the activity at AIFMRM – the number of challenges, research projects, grants and a great deal of collaboration, which is extremely positive. The institute is engaging in real-world problems and coming up with good ideas and solutions,” he says.

While in South Africa, local industry was keen on the opportunity to gain from Dr Henrard’s expertise. He presented a masterclass for market traders, risk managers and quantitative analysts at ABSA in Johannesburg, examining the challenges seen in Europe and the US and the implications for the South African market.