Nobel Laureate Myron Scholes discusses the value of high-performance analytics
Myron Scholes is the originator of the Black-Scholes options pricing model. He recently spoke with Tom Kimner, leader of the Global Risk Practice for SAS, Scholes offers insights on the advantages of high-performance computing
What do you see as the future impact of high-performance technology?
Scholes: One benefit of high-performance analytics is models can be expanded to take in many more variables because computation time has been reduced. With high-performance analytics, the combination of the processing power, memory, speed and algorithmic development allow for a richer understanding of the problems.
Can high-performance analytics provide a competitive advantage for firms?
Scholes: Risk management is not just monitoring; it's really optimization. It's figuring out how to allocate capital, how much capital to allocate to strategies, and determining the return on those strategies. SAS is moving this to the forefront and allowing integration. High-performance analytics will enable firms to move risk management to the traders' or groups' desks.
What impact would high-performance analytics have had 20 or 30 years ago on your original option theory work if you'd known that there was a way to programmatically solve problems?
Scholes: That's a good one. In science you always have a trade-off between an analytical solution and a numerical algorithm to solve a computationally difficult problem. In the option world, we made assumptions about the underlying distribution, the evolutionary process and our ability to hedge risk that gave us an elegant, closed-form solution based on our assumptions.The wonderful part about having an analytical or closed-form solution is that it provides a benchmark, or a way to think about the problems that allows you to see the problems in a very rich way. The trade-off is that you have to be more parsimonious in the inputs.