MATLAB for Finance

Shivgan Joshihttp://stockcreditfinancecfa.blogspot.in/

Content

• Introduction• Old work and experience• Areas of Work of MATLAB in Industry• Job requirements • Conclusive points• Literature Review• Version of output • TTD• Conclusion

Introduction

• Usefulness with certification programs such as SAS

• How it takes your beyond excel • Comparison of MATALB SAS R Excel/VBA

Prerequisite

• Master level course in Finance

Linking old work and experience to MATLAB

• Old work ppt: Reliability, HPC, game theory, Neural network simulink etc

• Data cleaning, data modifications, data arrays, struct, rating matrix, selection of elements from rating matrix, banks internal rating and pod computations, post that you made

• For fixed income Bond pricing, CDS, and other leveraged fixed income tools on MATLAB

• Data handing from sql and other parameters for MATLAB

Areas of Work in Risk

• Back-testing of investment strategies• Credit risk modelling using KMV approach (Merton Model),

there is a tool of Moodies, and they are also working on Municipal bonds (question in Genpact)

• Monte-Carlo simulation , Portfolio Optimization • Statistical modelling, variance-covariance modelling, value at

risk modelling, regular risk reporting (hot spot reports, concentration reports), risk assessment and style analysis of money managers, term structure modelling, rich cheap analysis, Mark-to-market, Yield and CDS spreads

• Credit research reports covering liquidity and debt analysis (Equity based)

Job Requirements in MATLAB

• FRM L2 library: PD, LGD, Downgrade, Credit Rating Methodologies

• Functions such as struct & Pearson correlations • Monte Carlo and Black scholes• Scenario & Sensitivity Analysis, Portfolio Optimization, Asset

liability management • Real time risk management (looking across entire numbers)• Normalizing and making data relevant by Data cleaning

(playing with matrix) example for financial times series • A/L using different types of bonds with different durations

Conclusive points

1. As far as the comparison goes, R vs MATLAB, MATLAB is much easier and the only reason people do R in west is because R is free and MATLAB is very expensive

2. As per my knowledge R and SAS are not so much user friendly, although when it comes to hardcore data handling SAS is much much better. MATLAB is good for easier applications like backtesting

3. MATLAB Credit Risk : Credit Risk Modeling Using Excel and VBA is a good book to look out for excel based modeling which then can be taken into MATLAB (link was on the references of the above articles)

Literature review

1. Financial toolbox user’s guide (1500 pgs)2. Fixed income toolbox 2083. MATLABR (50 pages)

Version of Lessons

• In 10 minutes concept• MATLAB Financial toolbox Dummies• Linking it to CFA FRM: Questions of these

exam executed on MATLAB• Prepare / Sensitize yourself for MATLAB in

Finance

Financial toolbox user’s guide (1500 pgs)

1. Portfolio, Asset Allocation and Performance2. Credit Risk (Ratings etc)3. Financial times series (Trading data)4. Technical Analysis (Trading, may include Ago

or VAR or Regulations etc)5. Trading risk or Market risk is interesting for

Bank on CDS and other leveraged items

Increasing number of lines codes

• 10 Lessons of 10 min each

TTD (Internal use)

• Revise CFA L2 and FRM L2 Fixed income, also helpful in passing these 2 exams

• Revise Financial time series and Quant of CFA level 2

• Algo trading or related can be skipped

Online resources

• Simulation and Optimization in Finance + Website: Modeling with MATLAB By Dessislava Pachamanova, Frank J. Fabozzi, CFA

• Numerical Methods in Finance and Economics: A MATLAB-Based Introduction (Statistics in Practice)

• http://ocw.mit.edu/courses/sloan-school-of-management/15-450-analytics-of-finance-fall-2010/readings/

• http://ocw.mit.edu/courses/sloan-school-of-management/15-070-advanced-stochastic-processes-fall-2005/lecture-notes/

To Run on MATLAB

• http://ocw.mit.edu/courses/sloan-school-of-management/15-450-analytics-of-finance-fall-2010/lecture-notes/

2 ways to make the course

• Books• MIT or university course

List of areas to Cover

From Financial toolbox help [1500p]

1. Portfolio Analysis and Optimization in MATLAB

2. Investment metrics for portfolio optimization [2nd biggest section]

3. Credit risk (small section)4. Financial times series [biggest section]

Financial times series

• MATLAB or SAS which does it? • Both are used, SAS is in fact very popular• Is it used in Fixed income as well?• Not much• But you can learn some basics of how to do

that on SAS as well

Conclusion

• Everything is linked to exams• MATLAB basics will get over in some days • Links things that you can link to SAS or R, a file

called MATLABR will be useful • Might help you in SAS as well for the Base and

Advanced Exams