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Professor Bin Zhao: What Makes the MS in Quantitative Finance Program Special?
November 20, 2019
Written by NYU Shanghai Graduate Admissions
November 20, 2019
At the MS Quantitative Finance (MSQF) information session held at NYU Shanghai on October 26, Bin Zhao, Visiting Assistant Professor of Finance at NYU Shanghai, shared some industry and program insights. During the talk, Professor Zhao reflected on industry gaps and outlined strengths of the MSQF program, drawing on financial anecdotes from her own professional and academic experience. Here are some excerpts from her talk and the Q&A session at the end.
Significance of Qualified Foreign Institutional Investor (QFII)
The opening up of the Chinese financial market has created a lot of opportunities for both international and domestic investors, and the same is true for challenges.
For example, I got a phone call two months ago from my friend who had been working at one of the leading hedge funds in China and is now running her own fund. She asked me, “when evaluating stock prices, what was the discount rate you introduced to your students?” I was actually shocked by her question, because how could I actually say there is a specific discount rate? I know that many PE firms use 50% to discount everything. However, when you really open the stock market, you don't actually use the 50% discount for all stocks, because most of the stocks look very undervalued in this way.
So I asked her, “what made you ask me this question? ” She told me that QFII (Qualified Foreign Institutional Investor) can now access domestic A-share market and they are very concerned. They hoped they could do something to really understand international investors and QFII investors before they join the market. This example shows how you can see that domestic institutional investors these days are very concerned about the price impact brought by international investors, which underlines the increasing importance of cross-cultural understanding.
Historical context and looking forward
After the Chinese stock market started in 1992, there have been two bubbles in China in the past two decades. The first one was in 2006-2007, and the second one was in 2015. Though the figures looked very similar, the causes of these two bubbles were quite different.
When I was a professor at Shanghai Jiao Tong University, all finance professors became very popular among our university colleagues. Many colleagues asked the finance professors to meet for lunch because they wanted to ask about their portfolio, such as which stocks they should be investing in. The first half of 2015, until June 15th, was the peak of the market. The market had always been going out. But do you know what actually happened after 2015? The market crashed, especially in July, when more than thousands of stocks hit the bottom 10% of the limit a day, and over a thousand stocks suspended trading. A professional investor mentioned that he knew it was time to exit the market when he heard the cleaning lady in his office was also talking about stocks.
Now we are standing at a very special time, because this is the time when a lot of institutional investors and international investors are coming in. I also want to comment that it is not only QFII channels have removed the restrictions and helped them to come in, but also those newly-established stock connect programs have contributed to this, for example, Shanghai-Hong Kong Stock Connect Program and Shenzhen-Hong Kong Stock Connect Program. So you could already see the increasing impact from QFII investors. If you really understand the market, you can do a fantastic performance. We are standing in a very historical period. I think it is time to excel on the job market and industry. It is essential to have sufficient knowledge, and this program provides that.
Similarities between the Chinese and US Stock Markets
When people think about the Chinese market, the common impression is that it is very irrational and inefficient. In reality, if you follow all the academic guidelines, and compare with the US market, you will see that both markets are equally inefficient. You cannot actually tell which market is more inefficient and you should see that a lot of practices in the US can actually be applied in China.
So if you want to excel in Asian finance market, especially in China, it really requires very solid understanding of both the Chinese and US markets, and very advanced quant skills. This is what this program tries to teach you - a solid understanding of both markets and how to apply the necessary quant skills.
(Class Visit to Shanghai Stock Exchange)
Differences between the Chinese and US Stock Markets
Back to the stock market, in the US, if you look across all the universe of stocks into winners and losers, the winners will continue to outperform for the next six months and the losers will continue to underperform for the next six months as well. However, this phenomenon does not exist in China, because China has a very strong Reversal pattern. If you really do not understand these very important patterns in China, you are going to lose a significant amount of money on the market.
Strength of NYU MSQF program: Exposure to both US and Chinese markets
Personally, I teach the China Financial Markets course in the Quantitative Finance program. In that course, I am not only teaching students the fundamental institutional details, but also bringing in a lot of industry experts. But the more important thing is that we actually look at the similarities and contrasts between the US and Chinese markets. I have collaborated with Shanghai Stock Exchange over the past many years and utilized their data to do extensive research on the Chinese financial market, looking at not only the individual trading behavior, but also the important institutional trading behavior and corporate action as well.
Among different markets, there are similarities, but there are also many differences. So that is one of the key strengths of the program. You will study in the US, so you’ll have all the concrete foundations about financial theories. And then you will also have the exposure to the Chinese market, so you will understand how the China market actually works and be able to apply the foundational theories. This program will prepare you very well for your future, for example a major job, etc.
(Class Visit to Shanghai Futures Exchange)
Maybe it's not quite related, but for anyone who would be interested in investing in China, do you have any personal advice on both international and domestic investing?
There are many pieces of information to consider. The first one, if you can read Chinese, following the Chinese news is definitely better than following English text news for the domestic and Asia markets. Second, you need to deeply understand many important patterns in the Chinese market from the investors’ perspective. The third thing is that don’t try to speculate, because looking at all the old data, value investors actually win in the long run in Chinese market. There is so much different advice, but I think the most important advice is don't speculate, try to be a long-run value investor.
You just mentioned that we are in a special historical moment. You compare the differences between the situation in the US and Chinese market precisely. In the program, are we going to discuss what is going to happen in the future and how to catch up with the future?
Yeah, that's a very good question. The existing data tells us about the past, but predicting the future is indeed really the most important job for the industry practitioners. From the academic perspective, what we can do is give you solid training so you will have the capability to understand and excel in the market, no matter what happens. No program can teach you what's going to happen in the future. However, it’s more important to know what is the best strategy for you to do the future work, no matter the conditions.
I just read the introduction given by the admissions office. The course in the quantitative finance program teaches us a lot about the market industry and the financial industry. But there is very little class teaching us the fundamental science, like how to do programming and how to analyze data.
I think the brochure provides more specific course details. But I will say that in many courses, for example in my course, I will ask students to do homework and finance projects on the Chinese market, which requires a lot of data programming. Based on the other courses, you’ll have the opportunity to use programming skills. I think utilizing programming practically is more important, compared to just taking programming courses. I will give you the data, but it is your job to really uncover all those trends by using whichever software you want to use and to apply it in the finance market. I think that is probably the best way to understand how to use the tools in real life.
Is your course an overall introduction to the China financial market, or do you focus on segments stocks and quants?
That is a very good question. The topic of the course is Chinese financial market, so it includes the stocks, bonds, PE market, even derivatives market. But this course puts a large weight on the stock market for sure because this is the majority of the jobs and opportunities are appearing. There will also be very deep discussion about some of the issues using the most up to date research, which will help students further understand the markets. It is very important to know how investors think about the market, since investors are also a driving impact on the market. I bring in leading industry experts, like the presidents from leading multinational banks, and head fund managers in Shanghai, etc. They will be coming to the course to give guest lectures to share more leading industrial practices.
I am getting a Master’s of finance in Xi'an Jiaotong-Liverpool University and I have a question about the strategy of the quantitative part. We should use Python or Matlab to quantify. But when I look over the outline, there is no python or stata to quantify data. Yet the program's name is quantitative finance. There are a lot of securities companies needing students to use python or matlab to quant data.
I think that's a great question as many students may have similar concerns. I want to comment on what distinguishes this program from computer science master’s degree. We don't really specialize in teaching you on programming skills. Some people use Python, but I also understand and use that because of stock exchange. If you go to stock exchange or consulting firms, many of them just use STATA and SAS. I don’t think they really want you to just know one programming language.
I think what really distinguishes this program from a CS program is that our students are multi-disciplined, and capable of fully understanding the finance market. So, I think those quantitative skills are actually relatively much easier to cultivate than finance and economic knowledge. You can easily find computer science people to help you learn how to code. But to design a strategy, you can’t just find a computer science PhD to help you. You really need finance people to design the strategy. I think that really distinguishes this program from a very programming concentrated program - we are providing insight and expertise that you can’t easily teach yourself.