Michael Best

Translating finance into mathematics

On a sabbatical at Berkeley, Michael made a deal. The deal was that Michael would teach Rob Grauer quadratic programming and in return, Rob would teach Michael about finance. Michael’s mathematical mind needed to work out proofs for the qualitative theories Rob taught him and the proofs formed the basis of the work Michael teaches today.

“Once you translate the financial theory into mathematics, students pick it up quickly and get right to the heart of problems,” notes Michael. “For instance, in money management, there is gain and risk. Managers must optimize gain and minimize risk. You can translate this idea, which is the basis of Markowitz’s Mean Variance Portfolio theory, into mathematics and solve it with quadratic programming… so it’s an optimization problem.”

Some of Michael’s more recent work is developing algorithms for optimization with transaction costs. Money managers administer day-to-day investing and must account for transaction costs quickly and systematically. Michael’s algorithms help to achieve this accounting. Many of the algorithms Michael helps develop are in use by major financial institutions in Canada and the U.S.

Michael keeps teaching because of the students. “The students are the exciting thing. We work together, we have fun, they get an excellent education in finance, and then become great successes. Seeing their success… it just blows me away.”

University of Waterloo Mathematics, Annual Report 2005