Une comparaison

1. Comparison Between Nuclear
Physics and Quantitative Finance
Ahmed Rebai,
ahmed.rebai2@gmail.com
PhD in Nuclear Physics

2. Warning and risk disclaimer
Nowadays Trading carries a high
level of risk, and may not be suitable
for all investors. Since I am not an
economist, an arbitrager, a market
analyst, a market bull, a broker, or
even a day trader (for the moment), I
disown any responsibility for any
errors or misunderstandings caused
by this presentation
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3. PLAN
 Definitions
 Similarities: Strategy (Data=>Analysis=>Results)
 Similarities: Fluctuation and Randomness
 Similarities: Mathematical Modelling
 Similarities: Big Catastrophes
 Some Differences
 Did finance violate the laws of physics?
 Conclusion
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4. SOME DEFINITIONS
 Quantitative Finance: use quantitative
techniques like mathematics, statistics,
computer science to try to model the value of
financial securities and structure them to
hedge them. Deal with some questions
about:How interest rate be in the futur ? How
volatility be in the futur?
 Nuclear Physics: study subatomic structure of
atoms and nucleons using large experiments,
mathematical models and statistics
techniques
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5. DATA ANALYSIS RESULTS
Both are using the same strategies
SIMILARITIES: SAME STRATEGIES
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6. DATA
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7. DATA (PHYSICS)
Simulation: Monte
carlo Generator
Data
Nuclear physics FLUKA, MCNPX, ... Accelerator experiment
Particle physics Pythia, Geant4, ... Diffusion experiments
Astroparticle physics CORSIKA, AIRES,
REAS3, ...
Cosmic rays experiments
Data is often generated by experiments or by monte
carlo generators.
(A Monte Carlo technique: is any technique making
use of random numbers to solve a problem.)
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8. DATA (FINANCE)
 Special sites: Blommberg, CNBC, Reuters,
ex.com, DailyFx.com, ...
 Economic official report : Non Farm payroll
(NFP), UK CPI, German GDP, ...
 Economic indicator: S&P500, NASDAQ,
DOWJONES, FTSE …
 Using Monte Carlo to generate data.
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9. ANALYSIS
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10. ANALYSIS (PHYSICS)
Data Analysis needs computer resources:
programming languages + infrastructures
 Low level languages: C/C++ (open source)
 High level languages and Platforms: Python,
IDL, Matlab, ROOT-CERN
 Linux Environment...
 GPU/parallel programming: CUDA (NVIDIA) ,
MPI, OpenMP, ...
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11. ANALYSIS (FINANCE)
 Fundamental analysis take much time,
 Technical analysis no so sophisticated,
 Quantitative analysis takes into account market
evolution and its random nature.
 Then data analysis => pricing proces
(pricing, Forecasting, prediction...)
 Needs dedicated platforms: Metatrader,
Ninjatrader, Tradestation...
 High Frequency Trading => using algorithms
C/C++.
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12. RESULTS
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13. RESULTS (PHYSICS)
 Study the fundamental laws of nature.
 Search predicted particles by the standard
model (eg the Higgs boson)
 Or new particles (predicted by supersymmetry
theories beyond standard model)
 Exploring the universe (dark matter, dark
energy)
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14. RESULTS (FINANCE)
 Predicting the market movement
 Make a good return
 Profit
Money
$, €, ...
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15. SIMILARITIES (FLUCTUATION &
RANDOMNESS)
 In nuclear physics: arising from ” the
Heisenberg's uncertainty principle” (Quantum
nature of laws in atomic and subatomic scales):
=> Can't predict simultaneously the position x and
momentum p of particles.
 In quantitative finance: arising from ”the
efficient-market hypothesis”:
=> Can't predict the future market volatility and
price...
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16. SIMILARITIES (FLUCTUATION &
RANDOMNESS)
 In finance: the only reality is that price may go up
or down (increase or decrease):
 In quantum physics: quantum state involves a
superposition of quantum states of 2 different
particles ((Schrodinger's cat paradox):
alive dead
dead
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17. SIMILARITIES (FLUCTUATION &
RANDOMNESS)
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18. Mathematical Model
$ $ $
$
$
$
$
$ $
$
$
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19.  A fluctuating stock price => need for
probabilistic models => Random walk model
“Today’s price (PT
) = yesterday’s price (PT-1
) + a
change that is independent of all previous
information (CT
).”
PT = PT-1 + CT
(Since P1 = C1 P2 = P1 + C2 , P3 = P2 + C3 => PT = PT-1 + CT)
 The most important model for equities,
currencies, commodities, bonds and indices.
SIMILARITIES: Mathematical
Modelling
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20. SIMILARITIES: Mathematical
Modelling
 The Cox-Ross-Rubinstein option princing model
 Uses a discrete-time
 In a perfectly efficient market:No possibility of
arbitrage,
 At each time, the price can increase or decrease
and never both simultaneously.
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21. The Black and Scholes model
”The history of quants on Wall street is the history
of the ways in which practitioners and academics
have refined and extended the Black-Scholes
model” Emanuel Derman's book (My Life as a Quant: Reflections on
Physics and Finance)
SIMILARITIES: Mathematical
Modelling
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22. The Black and Scholes equation can be
transformed to a heat equation model:
Many methods of resolution:
 Green's function formalism,
 Numerical resolution (e.g finite differences)...
SIMILARITIES: Mathematical
Modelling
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23. SIMILARITIES: Mathematical
Modelling
 In physics to study the random motion of a free
particle in space (phase space)=> Wiener
process => Diffusion => heat equation model
 More general model : Fokker-Planck equation
(Diffusion and convection)
 In same case FK equation can be transformed
to a heat equation (cosmic rays acceleration)
I'll stop here because things start to be really complicated !!!
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24. But when things go wrong:
In finance:
 Global Financial Crisis,
 Flash Crash,
 Loss of money, Recession...
In nuclear physics:
 Nuclear Holocaust: Hiroshima, Nagasaki
 Nuclear Incidents: Chernobyl, Fukushima
Similarities: Big Catastrophes
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25. Similarities: Big Catastrophes
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26. Similarities: Big Catastrophes
Fukushima
Tchernobyl
Hiroshima
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27. Similarities: Big Catastrophes
2010 Flash Crash
2008 US Crisis
2008 Europe Crisis
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28. SOME DIFFERENCES
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29. SOME DIFFERENCES
 In Finance you are dealing with people ”the
crowd psychology”
 The world of finance and the world of people
is changing all over the time...
 History doesn't repeated itself....
 Where in physics history repeats itself all
the time you can do the same experiment
over and over again (Reproductibility)
 In physics you deal with particles, atoms...
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30.  In physics conservation laws: electric
charge conservation, momentum
conservation, energy conservation
 In finance no conservation laws: There is no
conservation law in stock market but it
depends on economic model...
SOME DIFFERENCES
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31. DID FINANCE VIOLATE THE
LAWS OF PHYSICS ?
Bankruptcy
of
Lehman
Brothers
The 2008 Financial Crisis
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32. DID FINANCE VIOLATE THE
LAWS OF PHYSICS ?
The myth of economic exponential growth model
meets the finite physics ressources :
Finance have long been inconsistent with physics
laws especially since the financial crisis unbalances
the instability of the global financial system..
But why ???
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33. CONCLUSION
Finance
&
Economy
Physics
econophysics
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