What is Computational Finance?
Often referred to as financial engineering, computational finance is a process that relies on the application of several factors in order to arrive at conclusions regarding such matters as investments in stocks and bonds, futures trading, and hedging on stock market activity. Generally speaking, the wide umbrella of computational finance will employ the disciplines of mathematical science, number theories, and the use of computer simulations to explore the potential risks as well as the probably outcomes of any such transaction. Here are a few examples of how computational finance is used each day in a number of different scenarios. One of the most common applications of computational finance is within the arena of investment banking. Because of the sheer amount of funds involved in this type of situation, computational finance comes to the fore as one of the tools used to evaluate every potential investment, whether it be something as simple as a new start-up company or a well establi
Computational finance as a discipline emerged in the 1980s. It is also sometimes referred to as “financial engineering,” “financial mathematics,” “mathematical finance,” or “quantitative finance.” It uses the tools of mathematics, statistics, and computing to solve problems in finance. Computational methods and the mathematics behind them have become an indispensable part of the finance industry. The industry to which computational finance is applied roughly divides into two parts, the sell side and the buy side. The sell side consists of the trading operations of investment banks that create and market a wide variety of financial products, including options, futures, and interest rate caps, floors, and swaps. Sometimes these investment banks are simply matching buy orders with sell orders, but often they are selling something that they have created and then they buy related instruments in order to be able to pay off on what they have sold if it becomes necessary. The buy side, on the
There is no exact definition of computational finance. Basically, it refers to researches which use advanced computing techniques, such as computational intelligence, to studying problems in economics and finance. One area of research in computational finance is to use genetic programming (a branch of evolutionary computation, which borrows its ideas from natural selection) to financial forecasting. Another area of research is to build models of financial markets to enable policy makers or banks to ask “what if” questions; this allows one to design new market mechanisms (as one would wind-tunnel test aircraft designs). For more information, see Tsang and Martinez-Jaramillo’s paper in IEEE CIS Newsletter Vol2, No.3, August 2004. About Us This is an inter-disciplinary research team that applies artificial intelligence research to Computational Finance. Members in this group come from: School of Computer Science and Electronic Engineering, Department of Economics, Department of Mathematic
