Sunday, 17 November 2013

What a Difference a Ph.D. Makes: More than Three Little Letters

For those working in quantitative finance, this has been expected for a while. Now, there is some good solid research backing up this claim. The full paper is available here.

"Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading economics and finance journals further enhance the performance gap."


  1. Not everyone will be a star on a prop desk or on the buy side but the positive news for those in quantitative disciplines is that the remuneration trajectory is better than those with other graduate degrees such as MBAs. All other things being equal, and the aforementioned PhDs stay in the quantitative career path and don't broaden out then it should be a positive but in the latter case an MBA remains a positive given the breath of the training but the glut of newly minted MBAs a negative, as does the fact that more graduates are coming out with unrealistic expectations based on fiction rather than fact.
    There should be a clear understanding that the quantitative focus in banking in particular and financial services generally comes at a cost of redundancy: more front office functions in capital markets are being replaced by quantitative analysts writing code. A desk that had coverage of (say 10 people) people even 15 years back is a skeleton of that now as traders/brokers/dealers have to know the myriad systems that enable execution and price discovery.
    One final observation would be that having the numeracy skills gets people through the door and many employers are willing to pay the premium however such individuals who can marry the PhD with economic intuition and an ability to communicate will be the biggest winners. GIGO remains as relevant as ever.

  2. This may be of interest to your students: