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Financial modeling

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Financial modeling is the job of building a financial model, a tool designed to forecast the performance of a business, project, or any other form of financial investment. A financial model uses relationships among macro-economic, operating, investing, tax, accounting, and financing variables to predict performance. The central aim of financial modeling is to forecast under uncertainty. A financial model must allow multiple scenarios to be run efficiently (deterministic modeling), and ideally also support probabalistic (or stochastic) Risk modeling.

There is considerable debate amongst experts in the industry as to the nature of financial modeling: is a tradecraft (welding) or a science (metallurgy)? That it is rarely taught as a central part of the curriculum within MBA programs, suggests some lean to the former position, and a clear distinction with the academic pursuit of financial analysis. To define financial modeling as:

The trade skill required to produce a tool for financial analysis

is probably generally on point. This definition also focuses the topic on aspects of financial modeling that relate to craft experience: the importance of simplicity for a durable design; learning as much from the experience and lessons-learned of predecessors in the craft more than academic works, rigorous attention to mind-numbing detail that adds up in the ultimate product, etc.

Selected areas of financial modeling application

Selected books

  • Ongkrutaraksa, Worapot (2006). Financial Modeling and Analysis: A Spreadsheet Technique for Financial, Investment, and Risk Management, 2nd Edition. Frenchs Forest: Pearson Education Australia. ISBN 0-733-98474-6.
  • Swan, Jonathan (2008). Practical Financial Modelling, 2nd Edition. London: CIMA Publishing. ISBN 0-750-68647-2.
  • Vladimirou, Hercules (2007). Financial Modeling. Norwell, MA: Springer. ISBN 0-585-13223-2.
  • Jondeau, Eric (2007). Financial Modeling Under Non-Gaussian Distributions. London: Springer. ISBN 1-846-28419-9. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  • Benninga, Simon (2006). Principles of Finance with Excel. New York: Oxford University Press. ISBN 0-195-30150-1.
  • Swan, Jonathan (2005). Practical Financial Modelling. London: CIMA Publishing. ISBN 0-750-66356-1.
  • Fabozzi, Frank J. (2004). Financial Modeling of the Equity Market: From CAPM to Cointegration. Hoboken, NJ: Wiley. ISBN 0-471-69900-4. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  • Tjia, John (2003). Building Financial Models. New York: McGraw-Hill. ISBN 0-071-40210-1.
  • Benninga, Simon (1997). Financial Modeling. Cambridge, MA: MIT Press. ISBN 0-585-13223-2.

See also

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