Quants worth following: Clemens Kownatzki

April 12, 2024
Title picture for Quants worth following: Clemens Kownatzki

"Quants worth following" is our latest interview series highlighting thought leaders in the quantitative trading industry actively sharing their knowledge and resources with the community.

This edition of the series features Clemens Kownatzki, Associate Dean and Assistant Professor of Finance at the Pepperdine Graziadio Business School. Clemens joined Pepperdine University in 2010, performing extensive research in the area of derivatives and the effects of market volatility on investment returns. Prior to transitioning into academia, Clemens worked in the financial services industry for over two decades.

In this interview, Clemens discusses his research focus, the theory vs. application of models in academia, his musical background, and career advice and resources for those entering the industry.

Clemens shares his story of transitioning from being a market maker into being a professor and how his research interest grew over time:

"When you're working in the industry, you never have time to do any research. You're just here to try to get your systems in order, try to get your strategies in order and then make money.

Whenever I had a research idea I had to kind of push it aside, and after many, many years I had this huge repository of ideas. I thought, 'Oh my god, I wish I could find time to do that,' and when I transitioned into academia about a little more than a decade ago… I had this huge repository of questions. I said, 'Oh my god, I feel like a kid in a candy store now. I need to do research.'"

Having extensive knowledge and experience within foreign exchange, Clemens dives into his research on derivatives.

"My research focus is and always has been this weird area of derivatives. In particular, pricing of derivatives, volatility, volatility [forecasting], option pricing and so forth. As a former market maker in foreign exchange commodities and some derivatives, we always needed to have a good measure of volatility because that directly affects [the] cost of our options [and] our hedging strategies. We wanted to be delta-neutral at the end of the day. That's always been kind of my area of expertise."

As technology continues to advance and market data becomes more easily accessible, new areas of research open up. Clemens notes how traditional research is beginning to change and his research interests are expanding into market microstructure.

"In traditional research in academia, most of the financial data has been daily data, or weekly or monthly data. Now, with more technologies and thanks to companies like Databento, [we] have a bit more access to intraday data. That opens up a lot more areas of research, so I've been kind of interested in market microstructures, how returns on a very small scale translate into larger scale returns, and even more so with volatility forecast. Comparing the traditional models like ARCH, GARCH, and realized volatility and implied volatility… with some of the more machine learning tools, transformer models and so forth. I'm working with some younger, smarter researchers that are a bit more up-to-date with transformers, but that's kind of been my focus more recently."

The goals of research can change depending on the environment in which you work. In academic research, there tends to be a spectrum of theory and application, and Clemens expresses where he falls on this spectrum.

"Depending on what type of private company you're with, I've always worked with kind of a small boutique-type market maker investment firm. There's basically no time to do research other than what affects your day-to-day operations. What do you need to do to give the traders the tools to be successful?

In academia, a lot of times, there are a lot of people who are very good theoretically. My struggle has been, 'How do you translate those theories into something that I can apply day-to-day?' So, my mind has always been like, okay, whatever I do in terms of research, I always have the angle, 'How would that affect my trading? How would I translate this great idea into a trading strategy?'

I can never think of it just on the beauty of the model, or the beauty of the math, or whatever the structure is of the model. I always have to think, 'Can I apply this tomorrow? Can I enhance this somehow?' A lot of times as you go through many of these kinds of exercises over the years, immediately sometimes you say 'That's beautiful, that's great, but it's not going to work.'"

"Something that most people are surprised to hear about: I actually came here to study music. I grew up in Europe, and at the time… I learned how to read music before I learned how to read words. Music has always been a big part of my life, upbringing, and background. I always had this musical interest, but at the same time I also liked math."

Clemens shares how he got started in finance and his first exposure to a Reuters terminal in the foreign exchange department of a bank.

"In high school… I had these summer jobs working in the bank, and the guy in the foreign exchange department somehow took pity on me and introduced me to that. The first time I sat in front of a Reuters terminal, it was the old screen with the green neon kind of letters, and it was like the Matrix movie, before the graphical user interface.

I was so fascinated because the guy explained to me that these are foreign exchange rates, and this is what drives the price of a currency. This was way before the Euro so we had Deutschmarks, French Francs, and all these different currencies. It was so fascinating to me, and I just loved the idea of figuring out why is something going up and why is something going down."

Although math and art seem unrelated, both skills can complement each other well and bring a new perspective to each field. Clemens notes, "I always thought that the people that I looked at that were very successful, whether it's in business or in finance, had some sort of a creative, innovative angle to them."

"My big advice: work on your quant skills but also work on your social skills."

A couple of overlooked skills, especially in the quant finance industry, are the benefits of social skills and networking. Students and early career individuals will spend most of their time building technical skills. Although necessary, Clemens highlights the value of creating connections and enjoying who you work with.

"When people go into an interview they always think: I need to get my quant, my math, my technical skills done. The technical skills are a necessary condition, but it's not sufficient, right? The interviewer and the people who are interviewing you and want to work with you, the teams that want to work with you, they think about it differently. They think, well, I need to spend 8 hours, maybe 10 [to] 12 hours with this person. It better be a person that I like."

Clemens acknowledges the time and effort it takes to build the technical skills needed for this industry, which often limits the time spent connecting with others. This is a good reminder of the importance of work-life balance and how socializing translates in both career and personal life.

"I know it's a challenge because to get to the technical skills you have to spend a lot of time in books and [studying], and that takes away from your experiences, your friends and your family, building these social skills."

Emphasizing this point of who we are rather than what we can do and the influence that the connections we make have on our career trajectory, Clemens adds: "I think generally this old notion of 'It's not what you know, but who you know,' still applies. That's really based on, no matter where you are, whether you're the highest paid CEO or not, you're still a human being."

Here are Clemens' current suggestions for books, papers, and podcasts:

Clemens suggests Emanuel Derman's My Life as a Quant and his paper "The Young Person's Guide to Pricing and Hedging," which includes the highly recommended "The Financial Modelers' Manifesto," co-written with Paul Wilmott.

"I'm really a big fan of Emanuel Derman. He's probably one of the first quants on Wall Street. He wrote this book called My Life as a Quant, but he also published a really cool paper called, 'The Young Person's Guide to Pricing and Hedging'…at the end of the paper he worked together with Paul Wilmott, who's another famous quant. He wrote the so-called,'The Financial Modelers' Manifesto.'"

Clemens finds this manifesto instructive for any person in finance, whether they're a young quant entering the industry or otherwise. He shares: "I teach derivatives and risk management, and at the end of my class, I typically cite this manifesto to impart some wisdom from somebody who is a physicist, one of the most famous quants on Wall Street, who basically says math alone is not going to do the trick. You have to understand the world a little better and understand the models, and its assumptions and its flaws."

"I'm also a fan of Aswath Damodaran… He's written numerous books, has hundreds of videos and spreadsheets, and lots of free data. He has his entire courses online on YouTube that you can watch."

"One of my favorite podcasts for finance is the Odd Lots with Tracy Alloway and Joe Weisenthal. I really like that. I also recently listened to Dmitri Bianco… but I also listen to other stuff. I like soccer so one of my favorite podcasts is Football Weekly from the UK."

In addition to the resource suggestions Clemens shared during the interview, he also sent us his list of Top 100 Books in Economics and Finance, and you can check out his YouTube channel.

Watch the full interview with Clemens on our YouTube channel here.