using financial econometrics in financial companies

[Binh]

Bros, could you tell us about the using of financial econometrics in financial companies/investment banks. As you may know, financial econometrics is the use of econometrics in finance, i.e stock, exchange rate ..etc. However, financial econometrics has developed very fast and somewhat move away from time series econometrics. Many new techniques has been developed in financial econometrics, i.e volatility models, multivariate conditional heteroskedasticity, nonparametrics, bootraping ..etc.

Seems that there are two main research methodologies using in financial analysis: i) mathematic modelling, usually called quantitative finance; and ii) financial econometrics. Using of both moethods are essentials for any researchers in financial industry.

My question is:

[i] Financial econometrics is a part of Quantitative Finance or not? If not, it may not correct if we translate Quantitative Finance as "Tai Chinh Luong". As "Tai Chinh Luong" should consider as financial econometrics, when "Kinh te luong" is econometrics.

[ii] Does financial econometricians have good opportunities to work in financial companies/investment banks? What are the common requirements of financial companies/investment banks when employing a financial econometricians, i.e good understanding of C++, quantitative finance.

Many Thks.

[neomikeo]

If you look at Lehman Brothers Quant Career website, the skills that they look for are: (http://www.lehman.com/careers/quants/whatwelookfor.htm)
"While we consider any job offer to be a long-term investment, we look for a specific skill that can be used more or less immediately within a particular facet of our quantitative business. Common examples are proficiency in statistical estimation and data analysis, understanding of derivatives models, knowledge of stochastic processes, and ability to program. It is not necessary to have all of these, but it is important to have some."

Basically, it summarizes probably two approaches to finance: (1) Continuous Time (for people with background in theoretical physics or applied maths) (2) Discrete Time (those with econometrics, statistics and financial economics). I think financial econometrics is used more with buy-side in asset management business while continuous time finance is used more at IB's front-desk to price derivatives products. Econometrics could be used in prop trading and risk management as well.

Though it is ideal to have both of these skills, it is important to know one very well like financial econometrics while learning math finance to communicate with others. It is even more important to master a sophisticated computing language like C++, Matlab or SAS. Derman in his book says something like: if you know how to program, even if you are not genius, you will always add value to the team.

Hope it helps.

[Khoa Tran]

Mr. Minh Nguyen was right. Let me add some more flavors.

As it is explicitly/implicitly said in the book How I became a quant, modern Quant Finance is no longer limited to stochastic calculus and derivatives pricing. It is now as broad as it includes Econometrics and even Game Theory (my opinion). Some authors claimed in the book that Econometrics was very useful for their quant careers.

So, I would say that Financial Econometrics is part of Quant Finance (i.e. it is the intersection of Quant Finance and Econometrics). It was my serious intention to gather applied mathematicians, computer scientists, hard scientists, and economists, entrepreneurs together. I still uphold this long-term goal.

[Binh]

Thks Mr. Minh Nguyet and Mr. Khoa for your clarifications. May I ask some more questions to understand more the work requirement in IBs or as a quant.

Mr. Minh Nguyet memntioned about financial economics (a typing mistake? Maybe he want to mention financial econometrics). Econs people usually good at economics modelling/game theory. However, my friend said that the understanding of economic modelling especially game theory, financial economics modelling can be very helpful for you to understand research papers in finance. So it seems that understanding of game theory, financial economics modelling is only a plus point for a researchers in IBs. Even if you are very good in game theory/financial economics modelling, you have no chance to work in IBs; however you can still find jobs in some other financial companies. Am I right?

Regarding the computer language programs, I think SAS is much different from Matlab and C++ (when Matlab is similar/can repalce C++ in many cases). Do IBs use SAS/S-Plus/Gauss in their office?

Many thanks to seniors for sharing your understanding and experiences with juniors.

[neomikeo]

Financial economics: it is certainly not a typo. Some hedge funds require quantitive researchers with fundamental background. In this sense, fundamental refers to financial economics or general finance with understanding like general equilibrium, macroeconomic & exchange rate modeling and market microstructure.

Regarding your concern, I think IB banks are too big for various roles that you might fit. What matters really is how strong your technical skills are.

About computer language, IB tends not really on third party vendors due to fast product innovations. SAS is very much desired in hedge funds or asset managers like BGI or Fidelity. The good thing about SAS is it could handle various stuffs from large dataset to OR very efficiently. The bad thing is that it costs a fortune just to get a license which IB might find it unjustified.

[giangle]

Originally Posted by neomikeo

What matters really is how strong your technical skills are.

Agree. Unless you have 2-3 years of industry experiences, recruiters would look for your skills (and IQ) rather than your knowledge.

Originally Posted by Binh

Do IBs use SAS/S-Plus/Gauss in their office?

Look at SAS and S-Plus websites, you'll be amazed by how many finance clients they have. Gauss seems to be more popular among academic, but I've seen job ads that require Gauss skills. Another language that has some potentials but not yet popular in finance is Ox. It's similar to C in both syntax and speed, but it has matrix functionalities similar to Gauss and Matlab.

[Binh]

Thks Minh Nguyet va Giang Le. I have the same thought that, for freshmen, recruiters look for your IQs rather than knowledge. I have two Ph.D friend, very good at Maths, econometrics even better than some Assist Prof but can not finds jobs in IBs. However, some other clever Masters can find jobs in IBs, even their knowledge is much lower than the above two Ph.D guys.

Regards.