Emanuel Derman | |
|---|---|
 Derman in July 2013 | |
| Born | 1945 (age 79–80) Cape Town, South Africa |
| Citizenship | United States |
| Alma mater | Columbia University University of Cape Town |
| Known for | Financial Modelers' Manifesto Black–Derman–Toy model Local volatility Derman–Kani model |
| Awards | 2000 Financial Engineer of the Year |
| Scientific career | |
| Fields | particle physics,financial engineering |
| Institutions | Goldman Sachs Salomon Brothers Columbia University |
| Doctoral advisor | Norman Christ |
Emanuel Derman (born 1945) is a South African-born academic, businessman and writer. He is best known as aquantitative analyst, and author of the bookMy Life as a Quant: Reflections on Physics and Finance.[1]
He is a co-author ofBlack–Derman–Toy model, one of the first interest-rate models, and the Derman–Kanilocal volatility or implied tree model, a model consistent with thevolatility smile.
Derman, who first came to the U.S. at age 21, in 1966, is currently aprofessor atColumbia University[2] and Director of its program infinancial engineering. Until recently he was also the Head of Risk and a partner at KKR Prisma Capital Partners, afund of funds. His bookMy Life as a Quant: Reflections on Physics and Finance, published byWiley in September 2004, was one ofBusiness Week's top ten books of the year for 2004.[3] In 2011, he publishedModels.Behaving.Badly, a book contrasting financial models with the theories of hard science, and also containing some autobiographical material.
Born to aSouth African Jewish family,[4] Derman obtained a B.Sc. (Hons) at theUniversity of Cape Town, and received aPh.D. intheoretical physics from Columbia in 1973, where he wrote a thesis that proposed a test for a weak-neutral current inelectron-hadron scattering. This experiment was carried out atSLAC in 1978 by a team led by Charles Prescott and Richard Taylor, and confirmed theWeinberg–Salam model. Between 1973 and 1980 he did research in theoretical particle physics at theUniversity of Pennsylvania, theUniversity of Oxford,Rockefeller University and theUniversity of Colorado at Boulder. From 1980 to 1985 he worked atAT&T Bell Laboratories, where he developed computer languages for business modeling applications.[citation needed]
In 1985 Derman joinedGoldman Sachs' fixed income division where he was one of the co-developers of theBlack–Derman–Toy interest-rate model.[citation needed]
He left Goldman Sachs at the end of 1988 to take a position atSalomon Brothers Inc. as head of Adjustable Rate Mortgage Research in the Bond Portfolio Analysis group.[citation needed]
Rehired byGoldman Sachs, from 1990 to 2000 he led the Quantitative Strategies group in theEquities division, which pioneered the study oflocal volatility models and thevolatility 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 a position at Columbia University and Prisma Capital Partners (acquired by KKR).[citation needed]
Derman was named the IAFE/SunGard Financial Engineer of the Year 2000,[5] and was elected to the Risk Hall of Fame in 2002. He is the author of numerous articles on quantitative finance on the topics ofvolatility and the nature offinancial modeling.[citation needed]
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."[citation needed]
Derman together withPaul Wilmott wrote theFinancial Modelers' Manifesto, a set of principles for doing responsible financial modeling.[6]
From February 2011 to July 2012, Derman wrote a financial blog for Reuters. Beginning in September 2012, for one year, Derman wrote a regular column for theFrankfurter Allgemeine Zeitung.[citation needed]
In 2011, Derman published a new book titledModels.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 the2008 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.
In 2016, Derman and Michael Miller published a textbook titledThe Volatility Smile, a textbook about the principles of financial modeling, option valuation, and the variety of models that can account for thevolatility smile.
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