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A Sea Change in Quantitative Finance

Wed, 21 Sep 2011 22:40:00 GMT

Quantivity has a brilliantly thought-provoking post on P - Q Convergence in Quantitative Finance. I will extract below but you should definitely read the whole thing.

Numerous smart people are foreshadowing a sea change in quantitative finance. This change has big alpha potential for the mathematically inclined, and will result in a much higher technical bar for those trying to learn algorithmic trading. And, pity those buy and hold investors.

Different folks are converging on this change in different colloquial ways. Derman has an upcoming book criticizing financial over-modeling. Taleb has been writing books on imprudent mathematical assumptions for many years. Haug has debunked Black-Scholes in several papers. Bouchaud and Potters have spent a decade popularizing econophysics by questioning classic dogma. Meucci wrote a book and has been teaching it for several years. Sornette is inventing quant macro by tackling crash modeling and prediction. Even big bank folks are jumping in, such as recent papers by Petrelli et al.

Despite different words, all boil down to the same fundamental change: convergence of the P and Q worlds. The financial crisis punctured the pristine mathematical world of Q risk-neutrality, laying seeds for bi-directional synergy with the real world P...

And to contribute something myself. Here's some video of the various people mentioned in the post:

Emanuel Derman : Where are we, and where are we going next?


Black Swan Theory by Nassim Nicholas Taleb


Marc Potters - Physics, Finance and Some Useful Mathematics


Jean-Philippe Bouchaud - Are markets efficient? A view from micro-structural data


Didier Sornette - Financial crises and risk management

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