He’s one of the world’s leading experts on the sophisticated, probabilistic financial-market techniques used by Wall Street arbitrageurs and investment bankers. Even so, USC’s newest full professor of mathematics says students who hope to learn to beat the market need to adjust their expectations.
“The basic models we use don’t teach you how to take advantage of the market, but that you cannot take advantage of the market,” explains Jaksa Cvitanic, who arrived at USC this semester from Columbia University.
Center for Applied Mathematics Director Boris Rozovsky, a member of the search committee that recruited Cvitanic, calls him “the best younger researcher in the field in the United States.”
Rozovsky expects the new professor to become a nucleus, as early as the year 2000, for an interdisciplinary group in computational finance involving mathematics, economics and business, with a research laboratory in the College of Letters, Arts and Sciences and a trading laboratory in the Marshall School of Business.
Cvitanic is already working with fellow Columbia University emigrés Fulvio Ortu and Fernando Zapatero, both assistant professors in the Marshall School’s department of finance and business economics, and with professor Michael Magill of the department of economics.
The field of computational finance is in high academic demand, and so are its graduates. Cvitanic’s former graduate students are found at such firms as Goldman Sachs and J.P. Morgan.
CVITANIC’S RESEARCH grows out of the work of 1997 Nobel laureates in economics Myron S. Scholes and Robert Merton, who showed how (in a perfect, “frictionless” market without transaction costs) money managers could insulate themselves from risk using sophisticated hedging strategies.
Scholes and Merton subsequently gained non-Nobel fame as principals in Long Term Capital Management, the multibillion dollar hedge fund that almost collapsed in 1998.
In an influential paper, Cvitanic showed that if the market imposes any transaction costs, however small, optimal strategy changes. A static, one-time, one-transaction strategy, while expensive, works better than a dynamic one involving multiple trades. (“There is No Non-Trivial Hedging Portfolio for Option Pricing with Transaction Costs,” Annals of Applied Probability, vol. 5, pp. 327-355.)
Cvitanic is now co-editing a “Handbook on Mathematical Finance” and serves as associate editor of three journals, the Annals of Applied Probability, Asia-Pacific Financial Markets and the Mathematics of Operations Research.
A NATIVE OF Croatia, Cvitanic received his B.A. in mathematics from the University of Zagreb and his Ph.D. from Columbia University, where he subsequently became an associate professor before moving to USC.
He lives in Manhattan Beach. “It’s different,” said Cvitanic, “but I like it better than Manhattan.”