
Good books for hackers interested in quant finance? - cioc
What are some good books/papers to read for someone who knows little about quantitative finance but would like to know more.  More specifically, what are good books for those who have a solid math and cs background.
======
veyron
You need to be a little more specific regarding your interests and background.
If you are interested in theory, there are plenty of books discussing specific
models. However, most practical or buzzword (e.g. HFT) books are rubbish
(think about it: if you have a profitable operation, why would you write a
book? Unless, like me, you have a screw loose :P )

If you want some practical discussions, "Trading and Exchanges" by Larry
Harris is a bit dated, but nothing comes close. Most of the descriptions are
still valid today (even if some of the mechanics have changed)

If you want something more along the lines of what a financial engineer would
know:

\- "Options, Futures, and other Derivatives" by John Hull (goes over basic
models without delving too deeply into theoretical math aspects)

\- "Stochastic Calculus for Finance II" by Steve Shreve (goes over the basic
stuff but has enough stats to keep a grad student happy)

\- "Monte Carlo Methods in Financial Engineering" by Paul Glasserman (much
more practical, and goes over subtleties of monte carlo simulation and other
stuff like low discrepancy sampling)

\- "Modelling Fixed Income Securities and Interest Rate Options" by Robert
Jarrow (walks through how to perform certain simulations, covers lots of
little details most theoretical books skip)

If you want something more theoretical:

\- "Introduction to Stochastic Calculus Applied to Finance" by Lamberton and
Lapeyre (Nice little intro)

\- "Arbitrage Theory in Continuous Time" by Tomas Bjork (Slower discussion,
larger breadth)

\- "Brownian Motion and Stochastic Calculus" and "Methods of Mathematical
Finance" by Karatzas and Shreve (Solid theoretical foundation, for the more
mathematically inclined)

There was a good non-measure theoretic discussion of financial models but the
name escapes me ATM.

~~~
joncooper
John Hull is canon. Read it, live it, love it, keep it under your pillow. It
is truly superb.

Nassim Taleb's "Dynamic Hedging" is the finest book I'm aware of on the
subject of actually trading/managing vol portfolios. It's REALLY good. And
dense.

"Paul Wilmott on Quantitative Finance" vol 1-3 are worth having as a
reference, perhaps.

~~~
joncooper
Let me add also:

"Analysis and Use of Financial Statements" by White, Sondhi and Fried.

It has nothing to do with computational finance but knowing more than nothing
about financial statements and how to think about what a company actually IS
can only help you in the long run. Also, it's quite interesting.

~~~
veyron
If you are going to go that route, I'd point to Brealey and Myers "Principles
of Corporate Finance".

------
JabavuAdams
Trading and Exchanges: Market Microstructure for Practitioners.

[http://www.amazon.com/Trading-Exchanges-Market-
Microstructur...](http://www.amazon.com/Trading-Exchanges-Market-
Microstructure-
Practitioners/dp/0195144708/ref=sr_1_1?ie=UTF8&qid=1320079747&sr=8-1)

I'm finding this a more interesting and detailed read than _Capital Markets
for Quantitative Professionals_. For instance, the book traces through
everything that happens when placing, executing, and settling typical trades.

On the other hand, I've taken the Canadian Securities Course, so perhaps
Capital Markets is a better introduction for total beginners.

~~~
kevinpet
Trading and Exchanges was my detailed introduction to what really happens in
the markets. I wish I could find a similarly detailed and coherent book on
corporate actions.

It's a few years out of date, but not painfully so. Madoff was still a huge
market maker, not a scandal, and it makes no mention liquidity rebates.

Edit: I should add that I had no trading background before reading the book, I
was just an engineer at a finance startup who still thought "order" and
"trade" were synonyms.

------
steve8918
It really depends on which angle you're coming from, when you mean "hacker".

Quantitative finance is all math, so in order to really understand it, you
need a solid background in probability and statistics. Even the most basic
concepts make heavy use of probability, so without strong fundamentals you
won't get very far.

There are other concepts, such as risk-free returns, etc that also play a big
part in quant finance. A book that I really enjoyed that gave a good
background in a lot of these concepts was "Trading Strategies for Capital
Markets".

One of the basic concepts of quantitative finance revolves around the Black-
Scholes equation, which calculates a price for an option. I would suggest
first looking this up as well as how it was derived, to see if you want to
pursue this further. If you're having a hard time with this, then quant
finance may not be what you're looking for.

A video tutorial website that seems decent for quant finance is Nathan's
Lessons:

<http://nathanslessons.com/?paged=3>

\-------------------

If what you REALLY mean is you want to program trading algorithms, that's a
bit of a different beast. For that you really need to understand how
algorithmic trading works, how the market microstructure works, how to place
trades, etc. For this there are a bunch of books but the best introductory
book is definitely "Trading and Exchanges: Market Microstructure for
Practitioners". It's a bit old, but still largely relevant and gives you a lot
of the history. I really wish they would update this book, because I would buy
it again. Another decent book is "Algorithmic Trading and DMA".

------
paperwork
Are you really interested in learning quant finance (learning how to
mathematically model various parts of financial markets, pricing/measuring
risk of specific instruments, etc.) or are you interested in programming
systems for the financial industry (trading/risk/compliance/banking/etc)?

This book, "Algorithmic Trading and DMA: An introduction to direct access
trading strategies" ([http://www.amazon.com/Algorithmic-Trading-DMA-
introduction-s...](http://www.amazon.com/Algorithmic-Trading-DMA-introduction-
strategies/dp/0956399207/ref=sr_1_6?ie=UTF8&qid=1320082050&sr=8-6)) is pretty
darn good if you are a programmer. However, if you really meant "quant
finance," then others can give you better suggestions :)

edit: I just remembered, Paul Wilmott and Hull have several introductory books
if you are interested in what is usually called "quantitative finance." This
means how to price options, futures, etc. From what I recall, this does NOT
mean using statistical correlations to trade two similar stocks, making
market-making models, etc.

------
dxbydt
I am a quant. I work at a bank. We do a fair amount of portfolio optimization
& price-analytics, in Scala, Matlab,C++, CPLEX. Its not hard to get your feet
wet with financial modeling, though reasoning about the models does take an
MFE or comparable education.

For example, here's a tiny scala pricer I coded up in 5 minutes to spit out
the price of a google at-the-money call expiring 47 days from now, on Dec 17
using a 10k Monte-Carlo simulation.

\--

val risk = 0.28 // google has a 28% implied vol

val T = 47.0/365 // 47 days annualized

println((1 to 10000).toList.map(_=>Random.nextGaussian).map(x=>595 *
exp((-risk * risk/2) * T + risk * sqrt(T) *
x)).map(x=>max(0,(x-595))).sum/10000)

\--

Output: $23 & change ( its selling at about $23 right now )

To veyron's excellent list, I'd add Brandimarte's "Numerical Methods in
Finance".

------
joshu
People think all quant finance is the same as HFT. It's not.

A big part of algorithmic trading and stat arb is portfolio management,
including deriving alpha, building risk models, etc.

The bible is: [http://www.amazon.com/Active-Portfolio-Management-
Quantitati...](http://www.amazon.com/Active-Portfolio-Management-Quantitative-
Controlling/dp/0070248826)

~~~
justnoise
Exactly. Where I used to work, anyone without a quant background would be
urged to buy a copy of Grinold and Kahn the bible you suggested above or
"Quantitative Equity Portfolio Management" by Chincarini and Kim.

------
SkyMarshal
Any of Paul Wilmott's books. Either his single _Introduction to Quantitative
Finance_ , or his three volume set. His focus is on knowing where models work
and where they break down, and how to avoid using them naively.
<http://wilmott.com/>

------
reverend_gonzo
Check out the quant.stackexchange.com site. There's a bunch of similar
questions there with good answers:
<http://quant.stackexchange.com/search?q=books>

Also, <http://quant.ly/> is essentially Hacker News for quants and often has
interesting articles.

~~~
willpower101
So is HN forum software? or did they just make a lookalike?

~~~
veyron
The arc <http://arclanguage.org/> source code for the site is available.

<http://news.ycombinator.com/item?id=1390689>

------
b_emery
There is a great list here:

[http://blog.hiremebecauseimsmart.com/post/2860511335/design-...](http://blog.hiremebecauseimsmart.com/post/2860511335/design-
your-own-mfe)

Note, scroll way down to see the content, the formatting is screwy. Note 2,
I'm not a quant but the math I do overlaps tremendously.

edit: previous HN discussion: <http://news.ycombinator.com/item?id=2130508>

~~~
crasshopper
or hit <F11> to see the content

------
rfurlan
Books I would recommend for beginners:

Evidence Based Technical Analysis: [http://www.amazon.com/Evidence-Based-
Technical-Analysis-Scie...](http://www.amazon.com/Evidence-Based-Technical-
Analysis-Scientific-Statistical/dp/0470008741)

Pairs Trading: [http://www.amazon.com/Pairs-Trading-Quantitative-Methods-
Ana...](http://www.amazon.com/Pairs-Trading-Quantitative-Methods-
Analysis/dp/0471460672)

Quantitative Trading: [http://www.amazon.com/Quantitative-Trading-Build-
Algorithmic...](http://www.amazon.com/Quantitative-Trading-Build-Algorithmic-
Business/dp/0470284889)

An Introduction to High Frequency Finance:
[http://www.amazon.com/Introduction-High-Frequency-Finance-
Ra...](http://www.amazon.com/Introduction-High-Frequency-Finance-Ramazan-
Dacorogna/dp/0122796713)

Trading and Exchanges: Market Microstructure for Practitioners:
[http://www.amazon.com/Trading-Exchanges-Market-
Microstructur...](http://www.amazon.com/Trading-Exchanges-Market-
Microstructure-Practitioners/dp/0195144708)

I also wrote a couple of very introductory articles, sadly I never got past
part #2: [http://www.bitcortex.com/2008/12/28/pragmatic-automated-
trad...](http://www.bitcortex.com/2008/12/28/pragmatic-automated-trading-
part-1/) [http://www.bitcortex.com/2009/01/04/pragmatic-automated-
trad...](http://www.bitcortex.com/2009/01/04/pragmatic-automated-trading-
part-2/)

I am could mentor 1-2 HN readers that are serious about getting into quant
trading. Just let me know you are interested :)

------
hugh3
Mark Joshi's (markjoshi.com) site has a pretty good set of information for
aspiring quants (in particular, see the "advice for aspiring quants" bit).

The "careers" forum on nuclearphynance.com is also pretty good, and might also
shatter some preconceptions about how easy it is to waltz into the industry.
(note: nuclearphynance seems to be down at the time of writing)

~~~
crasshopper
Here is a reddit link that collects a few quants (from nuclear phynance
mostly) saying that the labour market, especially the junior labour market, is
tight and not likely to expand any time soon:

[http://www.reddit.com/r/quantfinance/comments/jl5ea/there_ar...](http://www.reddit.com/r/quantfinance/comments/jl5ea/there_are_and_will_be_no_more_junior_hiring_in/)

If there's a SE, discussions on HN, thousands of MFE's being minted, and so
many books on quant finance topics, you really have to wonder if the quant
labour market isn't saturated.

~~~
apparatchik
If this is true (and I agree with you somewhat) what are the new MFE graduates
from Asia and here in the USA doing with their expensive degrees if they can't
find a job as quant?

~~~
hugh3
I'm sure the idea that there are _no_ jobs out there is exaggerated. A MFE
graduate can still find a position somewhere in a bank doing something vaguely
related to finance. But the days when anyone vaguely familiar with PDEs could
waltz into a bank and quickly start earning $300K may be drawing to a close.

There will, however, always be lucrative jobs for those who are _truly_
brilliant _and_ willing to work on stuff which is kinda boring.

~~~
crasshopper
The NP posts don't say there are _no_ jobs -- just that junior quant has 1000+
applicants per position.

Jane Street still jingles its bells up at MIT, but for those who are less than
six stdev's IQ or don't live in NYC / London, I would say focus on
petroengineering instead of quant finance. (Petroengineering is the highest
paying college major.)

------
jcardente
Ernie Chan's book, "Quantitative Trading: How to Build Your Own Algorithmic
Trading Business ", is a good starting point. It's a nice blend of theory and
pragmatic practice. Chan provides example implementations in Matlab to help
readers get started.

[http://www.amazon.com/Quantitative-Trading-Build-
Algorithmic...](http://www.amazon.com/Quantitative-Trading-Build-Algorithmic-
Business/dp/0470284889)

Chan's blog is informative as well,

<http://epchan.blogspot.com/>

------
king_magic
The Complete Guide to Capital Markets for Quantitative Professionals

[http://www.amazon.com/Complete-Quantitative-Professionals-
Mc...](http://www.amazon.com/Complete-Quantitative-Professionals-McGraw-Hill-
Investment/dp/0071468293)

Great book. It's what I recommend to my new developers when we hire them
without previous financial services experience.

------
pg_bot
The best resource for mastering probability, and financial mathematics are
Yufeng Guo's guides to passing actuarial exams. He takes the hacker approach
to teaching fairly difficult concepts so you can focus on solving problems
quickly. Most of the books recommended here are too traditional in their
approach,(boring) this is a true hacker guide to learning how to frame
problems correctly and then the math needed to solve them. If you are a decent
programmer you can figure out the application afterward. I used them to pass
the introductory actuarial exams and they are awesome.

Here is his page on actex, take a look at some of the previews and I think you
will be sold.
[http://www.actexmadriver.com/contributorinfo.cfm?ContribID=8...](http://www.actexmadriver.com/contributorinfo.cfm?ContribID=858)

------
raymondh
Two recommendations: "Options, Futures, and Other Derivatives" by John Hull
and "Dynamic Hedging" by Taleb.

------
adrianscott
The Origin of Wealth:

Evolution, Complexity, and the Radical Remaking of Economics
[http://www.amazon.com/Origin-Wealth-Evolution-Complexity-
Eco...](http://www.amazon.com/Origin-Wealth-Evolution-Complexity-
Economics/dp/1422121038/ref=sr_1_1?ie=UTF8&qid=1320081538&sr=8-1)

don't let the false prophets of equilibrium theory and efficient market theory
bend your ear too far ;)

if you get into looking for a job, there are a few books that list common
questions for quant jobs also...

------
zweiterlinde
Hull is always the first recommendation. After that, it depends what area
you're interested in. You could move on to Shreve for more hard core quantity
material, or go to Tsay (Analysis of Financial Time Series) for a time series
primer. You could try Natenberg for options material or Grinld and Khan for
portfolio management. Not too much useful material on HFT out there. Agreed
that Harris is useful but out of date.

------
shogunmike
If by 'quantitative finance' you mean option pricing then check out the books
by Mark Joshi:

\- 'The Concepts and Practice of Mathematical Finance' \- 'C++ Design Patterns
and Derivatives Pricing'

Also of note is Baxter & Rennie:

\- 'Financial Calculus: An Introduction to Derivative Pricing'

Once you've studied those and have a good grasp of Measure Theory, you'll want
to tackle Shreve, Vol II.

And a brief plug of my (slightly out of date!) quant finance website,
Quantstart.com.

------
gresrun
The Triumph of Contrarian Investing : Crowds, Manias, and Beating the Market
by Going Against the Grain

[http://www.amazon.com/Triumph-Contrarian-Investing-
Beating-A...](http://www.amazon.com/Triumph-Contrarian-Investing-Beating-
Against/dp/007143240X/ref=sr_1_3?s=books&ie=UTF8&qid=1320093736&sr=1-3)

------
apparatchik
See this thread with the same question for reference:
<http://news.ycombinator.com/item?id=1447438>

also this one: <http://news.ycombinator.com/item?id=1238906> with a comment by
pg there

------
achompas
Isn't veyron a quant (or someone who works in finance)? I'm hoping to see a
response from him/her.

~~~
veyron
I probably should have replied to this post, but I gave some recommendations
in a post to the parent

~~~
achompas
Thanks for the detailed response. Do you mind if I email you a couple of
questions?

~~~
veyron
go ahead. my email is intransigence123@gmail.com

------
gresrun
Being Right or Making Money

[http://www.amazon.com/Being-Right-Making-Money-
Davis/dp/0970...](http://www.amazon.com/Being-Right-Making-Money-
Davis/dp/0970265107/ref=sr_1_1?s=books&ie=UTF8&qid=1320093736&sr=1-1)

------
bobowzki
Create something of value instead...

------
zeta
Causality by Judea Pearl, Probability by Jaynes & Elements of Information
Theory by Cover.

The above will help you design trading strategies. For modelling derivatives
and such, you'll have to check out books on stochastic calculus (not my thing,
so can't help there).

~~~
eykanal
I own and have read Pearl's book "Causality", and it does not relate to
finance at all. It's a good book otherwise, though.

~~~
zeta
It doesn't relate to finance directly. But can be very useful for designing
trading strategies.

------
cioc
thanks for the answers everybody. I'll do a little bit of reading now. Nicely
surprised about how much info got compiled here. Cheers!

------
bretpiatt
<http://www.quantnet.com/quantnet-best-selling-books-2010/>

------
dangerboysteve
I thought the last crash basically trashed Quants and the idea you can model
financial system :)

If you are looking into getting into high frequency trading take note that the
world's exchanges are changing to crack down on some of the practices.

~~~
nhebb
Disclaimer: I'm not a quant and don't know where to source data on this topic.

But from what I'e read, the size of the derivatives market was approximately
5-6X global GDP in the mid 00's. Now, it's over 20X global GDP. If that market
ever crashed, we'd be looking back at the crash of '08 as 'good times'.

~~~
andylei
those numbers are really bad measures of risk. those are probably notionals on
derivatives. if you're trading a swap, the notional may be 100B, but the
amount actually at risk may be something like 10 bps, which is just 100MM.

Also, its not like if the market crashed, all of the value of the derivatives
go to zero. Derivative holdings always have counterparties. If you make 100MM,
someone else loses 100MM and vice versa. this isn't foolproof, as there is
counterparty risk, but it makes the system a lot more stable than your
statistics make it seem.

TLDR: The total risk of the derivative market is nowhere near 20X GDP.

~~~
nhebb
I'm not challenging you on this, but I still remember Buffet's comment from
years ago that they were weapons of mass destruction. What is the risk and how
do regulators ensure that any untoward risk is mitigated?

~~~
steve8918
Buffett makes a great deal of cash flow from writing options, so take what he
says with a grain of salt.

"The brilliance behind Buffett’s investment in Berkshire is astounding. He
effectively used (and uses) Berkshire as the world’s largest option writing
house. The premiums and cash flow from his insurance business created
dividends that he could invest in other businesses. But Buffett wasn’t just
buying Coca-Cola and Geico as many have been led to believe. Buffett was
placing some (short-term AND long-term) complex bets in derivatives markets,
options markets, and bond markets."

<http://pragcap.com/the-many-myths-of-warren-buffett>

