FME 2010: Global Meltdown Broadens Agenda for Research in Financial Math

January 24, 2011

The third meeting of the SIAM Activity Group on Financial Mathematics & Engineering, co-organized by Jean-Pierre Fouque (UC Santa Barbara) and Kay Giesecke (Stanford University), was held in San Francisco, November 19 and 20, 2010. With more than 250 participants, 10 plenary talks, and 25 contributed or invited minisymposia of four talks each, the program was so packed that it had to begin at 7:45 AM; it also included some very short speaking slots in order to accommodate the overwhelming international interest. Such was the enthusiasm for a high-level meeting in this field that one attendee from Europe joked about flying ten hours to give a ten-minute talk.

Since the previous SIAG FM&E meeting, held two years earlier as the financial crisis was spiralling into a global economic crisis, the role of mathematics in finance has come under media and peer scrutiny, and rightly so. The emerging consensus is that quantitative risk management was massively under-utilized in major banks, and that mathematicians, instead of being the elbow-holders of gut-instinct traders, needed to be elevated to more forceful positions within financial institutions. (Many banks have since re-organized so that modelers report to management rather than to traders.)

In the meantime, the academic discipline has broadened its focus to include the study of issues that led to the global meltdown. SIAG program director Kay Giesecke led a wide-ranging, but definitely forward-looking discussion at the SIAG business meeting. He and a number of others highlighted a greater role for data analysis as the foundation for financial models; the fact that a lot of data, deemed proprietary by financial firms, were not publicly available has slowed development in that direction. As Olivier Pironneau pointed out, however, data was not available at the beginning in other fields, such as meteorology, whereas it has now become central. He urged SIAM to play a role in encouraging the availability of free data. SIAG chair Jean-Pierre Fouque mentioned that SIAM had endorsed the creation of the Office of Financial Research under the new Dodd–Frank financial regulation act. Part of the office's mandate will be to collect data that can alert regulators and investors to excessive systemic risk.

Rama Cont, new chair of SIAG FM&E as of January 1, remarked that ten years ago a financial mathematics meeting such as this would have been largely about option pricing, whereas in San Francisco, new topics were everywhere: statistical aspects of risk management, impacts of high-frequency trading, liquidity risk, systemic risk, and regulation, among others. This was reflected in the topics of several speakers, including plenary lecturers René Carmona of Princeton University, on market-based systems to curb carbon emissions (by happenstance, just a few days later, California passed legislation for a cap-and-trade emissions system); Darrell Duffie of Stanford's Graduate School of Business, on the design of exchanges for trading derivatives, as mandated in the Dodd–Frank act (message: having more clearinghouses may be worse than having just one); Michael Gordy of the Federal Reserve Board, with a post-mortem on ratings models (message: modeling the time-varying uncertainty in volatility---in other words, stochastic volatility---is crucial).

The growth of the field can also be seen in the success of the new SIAM Journal on Financial Mathematics. At the business meeting in San Francisco, René Carmona, one of the co-editors-in-chief, gave a short report on the healthy submission rates that the journal has seen in its first two years; he emphasized that it was the demand shown by SIAG FM&E members at the first meeting (Boston, 2006) that led to the journal's creation two years later. The SIAG also has a new Junior Scientist Prize: In San Francisco, vice chair Thaleia Zariphopoulou presented the inaugural award to Erhan Bayraktar (University of Michigan), who then gave a lecture on some of the work on optimal stopping games highlighted in the prize citation.

Prior to the meeting, Pat Hagan of J.P. Morgan gave a day-long minicourse on practical aspects of valuation and hedging: It was very well-attended, with close to a hundred participants. Hagan's interest in giving the lectures, along with the high level of interest from primarily young academic financial mathematicians, spoke to the close interplay between academia and industry, ties that have only gotten stronger in the realm of the crisis. It does not feel premature to conclude that financial mathematics has been well integrated into the bedrock industrial, computational, and applied mathematics community that SIAM stands for. On the other hand, the field is still discovering itself and defining its remit, as lively subjects continually do. A plenary speaker (from industry) at another large financial math meeting last summer remarked that, after ten years away from academic meetings, he returned to find publishers' displays hosting dozens of new books, the vast majority of them lacking any data analysis whatsoever. That is indeed a valid criticism of the field, but the deficiency is very likely to change, based on the sorts of problems discussed at the San Francisco meeting.

Finally, it was noticeable that energy, commodities, and environmental mathematics have emerged as an important subfield. Problems of interest, as discussed at the meeting, include inventory dynamics (Glen Swindle, Crédit Suisse First Boston); modeling the electricity bid stack, where clean and dirty fuel energy suppliers compete (Michael Coulon, Princeton University); natural gas storage (Tony Ware, University of Calgary, and Nicola Secomandi, Carnegie Mellon University); market models for commodities (Sebastian Jaimungal, University of Toronto); and non-zero-sum stochastic game models for oligopolistic competition in energy markets (Michael Ludkovski, UC Santa Barbara, and Andrew Ledvina, Princeton University).

SIAG FM&E looks forward to its next conference, joint with the SIAM Annual Meeting in Minneapolis in 2012.---Ronnie Sircar, Princeton University.

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