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Concept
Quantitative analysis (finance)
Summary
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. The process usually consists of searching vast databases for patterns, such as correlations among liquid assets or price-movement patterns (trend following or mean 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. 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.
Quantitative finance started in 1900 with Louis Bachelier's doctoral thesis "Theory of Speculation", which provided a model to price options under a normal distribution. Harry Markowitz's 1952 doctoral thesis "Portfolio Selection" and its published version was one of the first efforts in economics journals to formally adapt mathematical concepts to finance (mathematics was until then confined to specialized economics journals). Markowitz formalized a notion of mean return and covariances for common stocks which allowed him to quantify the concept of "diversification" in a market. He showed how to compute the mean return and variance for a given portfolio and argued that investors should hold only those portfolios whose variance is minimal among all portfolios with a given mean return.
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