Wednesday, March 03, 2010

Stochastic Modeling is the Future in Financial Economics

The following is a forum question I recently responded to:

What kinds of courses do you recommend I take in preparation for a career in quantitative finance?

Make certain you include courses in stochastic modeling and simulations. In the past, determinism has dominated financial modeling as a methodology with dire results. A deterministic model is a mathematical construct in which outcomes are precisely determined through known relationships among states and events, without any room for random variation. In such models, a given input will always produce the same output. In contrast, stochastic models use ranges of values for both dependent and independent variables in the form of probability distributions. While deterministic models can still add value in financial economics and risk analysis, stochastic modeling is the future. Good luck!

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