Model-Driven Architecture in Financial Engineering

The current practice in financial engineering, especially in computational finance can profit from the Model-Driven Architecture approach known from software engineering. Many of the current problems in the practical implementation of financial models can be overcome by a domain specific language for finance. This paper proposes ThetaML as such a language and presents examples for its abilities. 1 Financial modeling Current discussions about financial modeling are mostly dominated by stochastic models for markets and processes. Prevailing mathematical tools of stochastic analysis are sufficiently advanced to model what we call the stochastic model. A much neglected but still highly relevant part of financial modeling is the structural model. The exact details of a complex financial product or a complex trading strategy are hard to express mathematically. The scientific challenge of modeling the structural model lies somewhere in between mathematics and computer science and is mostly neglected by both. One of the biggest modeling tasks faced by today’s financial industry is presented by an inflation of new terminology describing innovative financial derivatives. Many expressions used by quantitative analysts are ambiguous and cause a significant friction in communication. It is hard to locate the difficulty in financial modeling. Payments or delivery of certain amounts are normally well known about. Sales people do have a clear idea of all the structural features of their traded products. But still they will not be able to quickly specify all of them in a precise manner. As financial models, or in particular their structural part, grow above the complexity that is representable in a mathematical formula they tend to become difficult to maintain and to document precisely. Important details can often be found implicitly in the programming source code or in the legal documents arranged with the customer. It should be clear, that the original goal of a financial model is to point to a unique mathematical problem, for which solutions can be found numerically or algebraically. Currently there is no satisfactory standard for specifying the structural model. Therefore this document introduces a definition language that allows the specification of securities and strategies in a way that is intuitive and precise. The suggested language provides access to conditional statistical properties and some aspects of the sigma algebra, while still remaining simple and computable. Some approaches have previously been suggested for the purpose of documenting and automated processing of financial products. One such approach is the industry standard FpML. This is an XML dialect that allows the specification of a wide range of securities. It is designed as an exchange data format for the specification of traded securities [fpm04]. It is not suitable for the description of new products or the automated derivation of algorithms, since it does not cover