An older use of the term "financial engineering" that is less common today is aggressive restructuring of corporate balance sheets.[citation needed]
Mathematical finance is the application of mathematics to finance.[6] Computational finance and mathematical finance are both subfields of financial engineering.[citation needed] Computational finance is a field in computer science and deals with the data and algorithms that arise in financial modeling.
Discipline
Financial engineering draws on tools from applied mathematics, computer science, statistics and economic theory.[7]
In the broadest sense, anyone who uses technical tools in finance could be called a financial engineer, for example any computer programmer in a bank or any statistician in a government economic bureau.[8] However, most practitioners restrict the term to someone educated in the full range of tools of modern finance and whose work is informed by financial theory.[9] It is sometimes restricted even further, to cover only those originating new financial products and strategies.[6]
Despite its name, financial engineering does not belong to any of the fields in traditional professional engineering even though many financial engineers have studied engineering beforehand and many universities offering a postgraduate degree in this field require applicants to have a background in engineering as well.[10][11] In the United States, the Accreditation Board for Engineering and Technology (ABET) does not accredit financial engineering degrees.[12] In the United States, financial engineering programs are accredited by the International Association of Quantitative Finance.[13]
Quantitative analyst ("Quant") is a broad term that covers any person who uses math for practical purposes, including financial engineers. Quant is often taken to mean "financial quant", in which case it is similar to financial engineer.[14] The difference is that it is possible to be a theoretical quant, or a quant in only one specialized niche in finance, while "financial engineer" usually implies a practitioner with broad expertise.[15]
"Rocket scientist" (aerospace engineer) is an older term, first coined in the development of rockets in WWII (Wernher von Braun), and later, the NASA space program; it was adapted by the first generation of financial quants who arrived on Wall Street in the late 1970s and early 1980s.[16] While basically synonymous with financial engineer, it implies adventurousness and fondness for disruptive innovation.[17] Financial "rocket scientists" were usually trained in applied mathematics, statistics or finance and spent their entire careers in risk-taking.[18] They were not hired for their mathematical talents, they either worked for themselves or applied mathematical techniques to traditional financial jobs.[9][17] The later generation of financial engineers were more likely to have PhDs in mathematics, physics, electrical and computer engineering, and often started their careers in academics or non-financial fields.[19][20]
One of the prominent critics of financial engineering is Nassim Taleb, a professor of financial engineering at Polytechnic Institute of New York University[21] who argues that it replaces common sense and leads to disaster. A series of economic collapses has led many governments to argue a return to "real" engineering from financial engineering.
A gentler criticism came from Emanuel Derman[22] who heads a financial engineering degree program at Columbia University. He blames over-reliance on models for financial problems; see Financial Modelers' Manifesto.
Many other authors have identified specific problems in financial engineering that caused catastrophes:
Aaron Brown[23] named confusion between quants and regulators over the meaning of "capital"
The financial innovation often associated with financial engineers was mocked by former chairman of the Federal Reserve Paul Volcker in 2009 when he said it was a code word for risky securities, that brought no benefits to society. For most people, he said, the advent of the ATM was more crucial than any asset-backed bond.[29]
^Marek Capiski and Tomasz Zastawniak, Mathematics for Finance: An Introduction to Financial Engineering, Springer (November 25, 2010) 978-0857290816
^David Ruppert, Statistics and Data Analysis for Financial Engineering, Springer (November 17, 2010) 978-1441977861
^"MS in Financial Engineering". Columbia University Department of Industrial Engineering and Operations Research. Archived from the original on 2017-01-19. Retrieved 2017-01-18.
^Tanya S. Beder and Cara M. Marshall, Financial Engineering: The Evolution of a Profession, Wiley (June 7, 2011) 978-0470455814
^Ali N. Akansu and Mustafa U. Torun. (2015), A Primer for Financial Engineering: Financial Signal Processing and Electronic Trading, Boston, MA: Academic Press, ISBN978-0-12-801561-2
^ abSalih N. Neftci, Principles of Financial Engineering, Academic Press (December 15, 2008) 978-0123735744
^Richard R. Lindsey and Barry Schachter (editors), How I Became a Quant: Insights from 25 of Wall Street's Elite, Wiley (August 3, 2009) 978-0470452578
^Emanuel Derman, My Life as a Quant: Reflections on Physics and Finance, Wiley (September 16, 2004) 978-0471394204
^ abAaron Brown, Red-Blooded Risk: The Secret History of Wall Street, Wiley (October 11, 2011) 978-1118043868
^Aaron Brown, The Poker Face of Wall Street, Wiley (March 31, 2006) 978-0470127315
^Dan Stefanica, A Primer for the Mathematics of Financial Engineering, FE Press (April 4, 2008) 978-0979757600
^Akansu, Ali N.; Kulkarni, Sanjeev R.; Malioutov, Dmitry M., Eds. (2016), Financial Signal Processing and Machine Learning, Hoboken, NJ: Wiley-IEEE Press, ISBN978-1-118-74567-0
^Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, Random House (April 17, 2007) 978-1400063512
^Emanuel Derman, Models.Behaving.Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life, Free Press (July 24, 2012) 978-1439164990
^< Pablo Triana, The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis , Wiley (December 6, 2011) 978-0470529737
^< Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, Crown Business (February 2, 2010) 978-0307453372
^< Scott Patterson, Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System, Crown Business (June 12, 2012) 978-0307887177
