Emanuel Derman
Encyclopedia
Emanuel Derman is a South Africa
n-born academic, businessman and writer. He is best known as a quantitative analyst
, and author of the book My Life as A Quant: Reflections on Physics and Finance.
He is a co-author of Black-Derman-Toy model, one of the first interest-rate models, and the Derman-Kani local volatility
or implied tree model, a model consistent with the volatility smile
.
He is currently a professor
at Columbia University
and Director of its program in financial engineering, and is also the Head of Risk and a partner at Prisma Capital Partners, a fund of funds. His book My Life as A Quant: Reflections on Physics and Finance, published by Wiley
in September 2004, was one of Business Week's top ten books of the year for 2004. His forthcoming book Models.Behaving.Badly, will be published by Free Press in October 2011.
, and received a Ph.D.
in theoretical physics
from Columbia in 1973, where he wrote a thesis that proposed a test for a weak-neutral current in electron
-hadron
scattering. This experiment was carried out at SLAC
in 1978 by a team led by Charles Prescott and Richard Taylor, and confirmed the Weinberg-Salam model
. Between 1973 and 1980 he did research in theoretical particle physics at the University of Pennsylvania
, the University of Oxford
, Rockefeller University
and the University of Colorado at Boulder
. From 1980 to 1985 he worked at AT&T Bell Laboratories, where he developed computer languages for business modeling applications.
In 1985 Derman joined Goldman Sachs
' fixed income division where he was one of the co-developers of the Black-Derman-Toy interest-rate model.
He left Goldman Sachs at the end of 1988 to take a position at Salomon Brothers
Inc. as a Head of Adjustable Rate Mortgage Research in the Bond Portfolio Analysis group.
Rehired by Goldman Sachs
, from 1990 to 2000 he led the Quantitative Strategies group in the Equities division, which pioneered the study of local volatility models and the volatility smile. He was appointed a managing director of Goldman Sachs in 1997. In 2000 he became head of the firm’s Quantitative Risk Strategies group. He retired from Goldman Sachs in 2002 and took up his current positions at Columbia University and Prisma Capital Partners.
Derman was named the IAFE/Sungard Financial Engineer of the Year 2000, and was elected to the Risk Hall of Fame in 2002. He is the author of numerous articles on quantitative finance on the topics of volatility
and the nature of financial modeling
.
Since 1995, Derman has written many articles pointing out the essential difference between models in physics and models in finance. Good models in physics aim to predict the future accurately from the present, or to predict new previously unobserved phenomena; models in finance are used mostly to estimate the values of illiquid securities from liquid ones. Models in physics deal with objective variables; models in finance deal with subjective ones. “In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a usable theory of anything.”
Professor Derman together with Paul Wilmott
wrote the Financial Modelers' Manifesto
, a set of principles for doing responsible financial modeling.
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
n-born academic, businessman and writer. He is best known as a quantitative analyst
Quantitative analyst
A quantitative analyst is a person who works in finance using numerical or quantitative techniques. Similar work is done in most other modern industries, but the work is not always called quantitative analysis...
, and author of the book My Life as A Quant: Reflections on Physics and Finance.
He is a co-author of Black-Derman-Toy model, one of the first interest-rate models, and the Derman-Kani local volatility
Local volatility
A local volatility model, in mathematical finance and financial engineering, is one which treats volatility as a function of the current asset level S_t and of time t .-Formulation:...
or implied tree model, a model consistent with the volatility smile
Volatility Smile
In finance, the volatility smile is a long-observed pattern in which at-the-money options tend to have lower implied volatilities than in- or out-of-the-money options. The pattern displays different characteristics for different markets and results from the probability of extreme moves...
.
He is currently a professor
Professor
A professor is a scholarly teacher; the precise meaning of the term varies by country. Literally, professor derives from Latin as a "person who professes" being usually an expert in arts or sciences; a teacher of high rank...
at Columbia University
Columbia University
Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
and Director of its program in financial engineering, and is also the Head of Risk and a partner at Prisma Capital Partners, a fund of funds. His book My Life as A Quant: Reflections on Physics and Finance, published by Wiley
John Wiley & Sons
John Wiley & Sons, Inc., also referred to as Wiley, is a global publishing company that specializes in academic publishing and markets its products to professionals and consumers, students and instructors in higher education, and researchers and practitioners in scientific, technical, medical, and...
in September 2004, was one of Business Week's top ten books of the year for 2004. His forthcoming book Models.Behaving.Badly, will be published by Free Press in October 2011.
Biography
Derman who is Jewish (chapter 4 in his book "My life as a Quant"), studied at the University of Cape TownUniversity of Cape Town
The University of Cape Town is a public research university located in Cape Town in the Western Cape province of South Africa. UCT was founded in 1829 as the South African College, and is the oldest university in South Africa and the second oldest extant university in Africa.-History:The roots of...
, and received a Ph.D.
Ph.D.
A Ph.D. is a Doctor of Philosophy, an academic degree.Ph.D. may also refer to:* Ph.D. , a 1980s British group*Piled Higher and Deeper, a web comic strip*PhD: Phantasy Degree, a Korean comic series* PhD Docbook renderer, an XML renderer...
in theoretical physics
Theoretical physics
Theoretical physics is a branch of physics which employs mathematical models and abstractions of physics to rationalize, explain and predict natural phenomena...
from Columbia in 1973, where he wrote a thesis that proposed a test for a weak-neutral current in electron
Electron
The electron is a subatomic particle with a negative elementary electric charge. It has no known components or substructure; in other words, it is generally thought to be an elementary particle. An electron has a mass that is approximately 1/1836 that of the proton...
-hadron
Hadron
In particle physics, a hadron is a composite particle made of quarks held together by the strong force...
scattering. This experiment was carried out at SLAC
SLAC National Accelerator Laboratory
The SLAC National Accelerator Laboratory, originally named Stanford Linear Accelerator Center, is a United States Department of Energy National Laboratory operated by Stanford University under the programmatic direction of the U.S...
in 1978 by a team led by Charles Prescott and Richard Taylor, and confirmed the Weinberg-Salam model
Electroweak interaction
In particle physics, the electroweak interaction is the unified description of two of the four known fundamental interactions of nature: electromagnetism and the weak interaction. Although these two forces appear very different at everyday low energies, the theory models them as two different...
. Between 1973 and 1980 he did research in theoretical particle physics at the University of Pennsylvania
University of Pennsylvania
The University of Pennsylvania is a private, Ivy League university located in Philadelphia, Pennsylvania, United States. Penn is the fourth-oldest institution of higher education in the United States,Penn is the fourth-oldest using the founding dates claimed by each institution...
, the University of Oxford
University of Oxford
The University of Oxford is a university located in Oxford, United Kingdom. It is the second-oldest surviving university in the world and the oldest in the English-speaking world. Although its exact date of foundation is unclear, there is evidence of teaching as far back as 1096...
, Rockefeller University
Rockefeller University
The Rockefeller University is a private university offering postgraduate and postdoctoral education. It has a strong concentration in the biological sciences. It is also known for producing numerous Nobel laureates...
and the University of Colorado at Boulder
University of Colorado at Boulder
The University of Colorado Boulder is a public research university located in Boulder, Colorado...
. From 1980 to 1985 he worked at AT&T Bell Laboratories, where he developed computer languages for business modeling applications.
In 1985 Derman joined Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
' fixed income division where he was one of the co-developers of the Black-Derman-Toy interest-rate model.
He left Goldman Sachs at the end of 1988 to take a position at Salomon Brothers
Salomon Brothers
Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually...
Inc. as a Head of Adjustable Rate Mortgage Research in the Bond Portfolio Analysis group.
Rehired by Goldman Sachs
Goldman Sachs
The Goldman Sachs Group, Inc. is an American multinational bulge bracket investment banking and securities firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients...
, from 1990 to 2000 he led the Quantitative Strategies group in the Equities division, which pioneered the study of local volatility models and the volatility smile. He was appointed a managing director of Goldman Sachs in 1997. In 2000 he became head of the firm’s Quantitative Risk Strategies group. He retired from Goldman Sachs in 2002 and took up his current positions at Columbia University and Prisma Capital Partners.
Derman was named the IAFE/Sungard Financial Engineer of the Year 2000, and was elected to the Risk Hall of Fame in 2002. He is the author of numerous articles on quantitative finance on the topics of volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
and the nature of financial modeling
Financial modeling
Financial modeling is the task of building an abstract representation of a financial decision making situation. This is a mathematical model designed to represent the performance of a financial asset or a portfolio, of a business, a project, or any other investment...
.
Since 1995, Derman has written many articles pointing out the essential difference between models in physics and models in finance. Good models in physics aim to predict the future accurately from the present, or to predict new previously unobserved phenomena; models in finance are used mostly to estimate the values of illiquid securities from liquid ones. Models in physics deal with objective variables; models in finance deal with subjective ones. “In physics there may one day be a Theory of Everything; in finance and the social sciences, you’re lucky if there is a usable theory of anything.”
Professor Derman together with Paul Wilmott
Paul Wilmott
Paul Wilmott is a researcher, consultant and lecturer in quantitative finance. He is best known as the author of various academic and practitioner texts on risk and derivatives, and for Wilmott magazine and Wilmott.com , a quantitative finance portal....
wrote the Financial Modelers' Manifesto
Financial Modelers' Manifesto
The Financial Modelers' Manifesto was a proposal for more responsibility in risk management and quantitative finance written by financial engineers Emanuel Derman and Paul Wilmott. The manifesto includes a Modelers' Hippocratic Oath...
, a set of principles for doing responsible financial modeling.
Models.Behaving.Badly
In 2011, Prof. Derman published a new book titled Models.Behaving.Badly: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life. In that work he decries the breakdown of capitalism as a model during the bailouts characterizing the 2008 financial crisis and calls for a return to principles, to the notion that if you want to take a chance on the upside, you have also taken a chance on the downside. More generally, he analyzes three ways of understanding the behavior of the world: models, theory and intuition. Models. he argues, are merely metaphors that compare something you would like to understand with something you already do. Models provide relative knowledge. Theories, in contrast, are attempts to understand the world on absolute terms; while models stand on someone else's legs, theories, like Newton's or Maxwell's or Spinoza's, stand on their own. Intuition, the deepest kind of knowledge, comes only occasionally, after long and hard work, and is a merging of the understander with the understood. His book elaborates on these ideas with examples from the theories of physics and philosophy, and the models of finance.External links
- Emanuel Derman: Writings on Quantitative Finance - Personal website
- Curriculum Vitae
- His profile at Department of Industrial Engineering and Operations Research, Columbia UniversityColumbia UniversityColumbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
- Derman's Blog