Psychological Contract

The Application of Operations Research Techniques to Financial Markets

Operations Research, OR, has been applied to problems in finance for at least the last half

century. The INFORMS data base of academic papers in OR journals since 1982 classifies

nearly 3% of the entries as being concerned with finance. For the journal Management Science

over the same period this proportion is over 10%. There is an even larger number of papers on

the application of OR techniques to finance in the finance, mathematics, engineering and other

literatures, so that, in total, there are several thousand papers which apply OR techniques to

finance in academic journals. Equally, OR has played a part in the adoption by the financial

markets of the new finance theories. For example, in the 1960s and 1970s the Management

Science group at Wells Fargo Bank in San Francisco pioneered the used of new finance theories,

and introduced the first index tracking fund in July 1971 (Bernstein, 1992). As part of the

increased use of mathematical models in finance (Merton, 1995), investment banks have

recruited staff skilled in quantitative techniques, including OR, to devise pricing equations and

analyse market data - the so called “quants” or “rocket scientists”.

This paper considers the application of OR techniques to financial markets. This covers

decisions concerning trading by decision makers in financial markets (e.g. the debt, equity and

foreign exchange markets and the corresponding derivatives markets), and represents a more

recent and still growing area for the application of OR techniques to finance. This paper does

not consider the more traditional applications of OR to the management of the firm’s finances:

working capital management (which can be subdivided into the management of cash, receivables

and liabilities), capital investment (including the appraisal and implementation of sets of large

interdependent investments), multinational taxation, and financial...