Sheffield Café Scientifique

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February Café Understanding Finance through Physics

03 Feb 2014
Dr John Fry, (Sheffield University Management School)
There is a long history through which physics has provided tools and concepts that have proved useful in finance – with many further developments possible. A key starting point is Louis Bachelier’s discovery of Brownian motion in 1900 – originally conceived as a model for the Parisian stock market – and preceding Einstein’s discovery of Brownian motion by 5 years. However, the story of physics and finance is also surprisingly wide-ranging and incorporates the discovery of nylon, the atomic bomb project in Los Alamos, pioneering work by Thorp and Mandelbrot and the Black-Scholes-Merton option-pricing formula - for which Scholes and Merton were awarded the Nobel Prize in Economics in 1997. Lasting contributions of physics to finance include applications in Options pricing, algorithmic trading strategies and mathematical modelling of bubbles and financial crashes. The talk will conclude by discussing recent applications to house prices.