Quantitative analysis (finance)
Quantitative analysis is the use of mathematical and statistical methods in finance and investment management. Those working in the field are quantitative analysts (quants). Quants tend to specialize in specific areas which may include derivative structuring or pricing, risk management, investment management and other related finance occupations. The occupation is similar to those in industrial mathematics in other industries.[1] The process usually consists of searching vast databases for patterns, such as correlations among liquid assets or price-movement patterns (trend following or reversion).
Although the original quantitative analysts were "sell side quants" from market maker firms, concerned with derivatives pricing and risk management, the meaning of the term has expanded over time to include those individuals involved in almost any application of mathematical finance, including the buy side.[2] Applied quantitative analysis is commonly associated with quantitative investment management which includes a variety of methods such as statistical arbitrage, algorithmic trading and electronic trading.
Some of the larger investment managers using quantitative analysis include Renaissance Technologies, D. E. Shaw & Co., and AQR Capital Management.[3]
– Also used to solve partial differential equations, but Monte Carlo simulation is also common in risk management;
Monte Carlo method
– used to interpolate values from spot and forward interest rates curves, and volatility smiles;
Spline interpolation
Newton, and Secant methods – used to find the roots, maxima and minima of functions (e.g. internal rate of return, interest rate curve-building.)
Bisection
(SIAM) Journal on Financial Mathematics
Society for Industrial and Applied Mathematics
Quantitative Finance
[18]
Risk Magazine
Wilmott Magazine
Finance and Stochastics
[19]
Mathematical Finance
development
Trading strategy
and hedging: involves software development, advanced numerical techniques, and stochastic calculus.
Derivatives pricing
Credit analysis
Asset and liability management
Asset pricing
1900 – , Théorie de la spéculation
Louis Bachelier
1938 – , The Movements of Interest Rates. Bond Yields and Stock Prices in the United States since 1856, pp. 44–53, Bond duration
Frederick Macaulay
1944 – , "Stochastic Integral", Proceedings of the Imperial Academy, 20(8), pp. 519–524
Kiyosi Itô
1956 – , A New Interpretation of Information Rate
John Kelly
1958 – and Merton Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, Modigliani–Miller theorem and Corporate finance
Franco Modigliani
1964 – , Capital asset prices: A theory of market equilibrium under conditions of risk, Capital asset pricing model
William F. Sharpe
1965 – , The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets, Capital asset pricing model
John Lintner
1967 – and Sheen Kassouf, Beat the Market
Edward O. Thorp
1973 – and Myron Scholes, The Pricing of Options and Corporate Liabilities and Robert C. Merton, Theory of Rational Option Pricing, Black–Scholes
Fischer Black
1979 – ; Stephen Ross; Mark Rubinstein, Option pricing: A simplified approach, Binomial options pricing model and Lattice model
John Carrington Cox
1980 – Lawrence G. McMillan, Options as a Strategic Investment
1982 – Barr Rosenberg and Andrew Rudd, Factor-Related and Specific Returns of Common Stocks: Serial Correlation and Market Inefficiency, Journal of Finance, May 1982 V. 37: #2
1982 – , Autoregressive Conditional Heteroskedasticity With Estimates of the Variance of U.K. Inflation, Seminal paper in ARCH family of models GARCH
Robert Engle
1985 – , Jonathan E. Ingersoll and Stephen Ross, A theory of the term structure of interest rates, Cox–Ingersoll–Ross model
John C. Cox
1987 – Giovanni Barone-Adesi and , Efficient analytic approximation of American option values. Journal of Finance. 42 (2): 301–20. Barone-Adesi and Whaley method for pricing American options.
Robert Whaley
1987 – , Robert A. Jarrow, and Andrew Morton Bond pricing and the term structure of interest rates: a new methodology (1987), Heath–Jarrow–Morton framework for interest rates
David Heath
1990 – , Emanuel Derman and William Toy, A One-Factor Model of Interest Rates and Its Application to Treasury Bond, Black–Derman–Toy model
Fischer Black
1990 – and Alan White, "Pricing interest-rate derivative securities", The Review of Financial Studies, Vol 3, No. 4 (1990) Hull-White model
John Hull
1991 – Ioannis Karatzas & . Brownian motion and stochastic calculus.
Steven E. Shreve
1992 – and Robert Litterman: Global Portfolio Optimization, Financial Analysts Journal, September 1992, pp. 28–43 JSTOR 4479577 Black–Litterman model
Fischer Black
1994 – RiskMetrics Group, RiskMetrics Technical Document, 1996, RiskMetrics model and framework
J.P. Morgan
2002 – Patrick Hagan, Deep Kumar, Andrew Lesniewski, Diana Woodward, Managing Smile Risk, Wilmott Magazine, January 2002, .
SABR volatility model
2004 – , My Life as a Quant: Reflections on Physics and Finance
Emanuel Derman
List of quantitative analysts
Quantitative fund
Financial modeling
Black–Scholes equation
Financial signal processing
Financial analyst
Technical analysis
Fundamental analysis
Financial economics
Mathematical finance
Alpha generation platform
(1992) Capital Ideas: The Improbable Origins of Modern Wall Street
Bernstein, Peter L.
Bernstein, Peter L. (2007) Capital Ideas Evolving
(2010). The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. Crown Business, 352 pages. ISBN 0-307-45337-5 ISBN 978-0-307-45337-2. Amazon page for book via Patterson and Thorp interview on Fresh Air, February 1, 2010, including excerpt "Chapter 2: The Godfather: Ed Thorp". Also, an excerpt from "Chapter 10: The August Factor", in the January 23, 2010 Wall Street Journal.
Patterson, Scott D.
Analysing Quantitative Data for Business and Management Students
Society of Quantitative Analysts
Q-Group Institute for Quantitative Research in Finance
CQA—Chicago Quantitative Alliance
Quantitative Work Alliance for Finance Education and Wisdom (QWAFAFEW)
Professional Risk Managers Industry Association (PRMIA)
International Association of Quantitative Finance
London Quant Group
at Stack Exchange – question and answer site for quantitative finance