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Making Quantitative Analysis and Modelling Payoff

By

Dr. Forster Kum-Ankama Sarpong


A quantitative analyst or, in financial jargon, a quant is a person who specializes in the
application of mathematical and statistical methods such as numerical or quantitative
techniques to financial, investment and risk management problems. 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 mathematics in finance,
including the buy side. Examples include statistical arbitrage, quantitative investment
management, algorithmic trading, and electronic market making.
Quantitative modelling is important for research in financial, investment and risk management
sector. Market competition and recent progress in data collection and data storage techniques
have increased the importance of quantitative modelling. Modelling has become an important
part of research and development across many fields of study, having evolved from a tool to a
discipline in less than two decades.

There is the need to give an overview of quantitative analysis methods and models, as
quantitative modelling enables banks and investment companies to devise their own specific
risk models. It facilitates them to model changing economic and regulatory landscapes quickly
and economically. Recently, quantitative modelling has received a lot of attention in the
financial sector. Modelling framework and software tools enhance the performance of
business.
Quantitative models provide diagramming techniques to document business process for
growth. Most people are not experts in predicting the outcomes of the systems governed by
quantitative modelling.
In financial operations, quantitative models work to determine prices, manage risk, and
identify profitable opportunities. Historically this was a distinct activity from trading but the
boundary between a desk quantitative analyst and a quantitative trader is increasingly blurred,
and it is now difficult to enter trading as a profession without at least some quantitative
analysis education. In the field of algorithmic trading it has reached the point where there is
little meaningful difference. Front office work favours a higher speed to quality ratio, with a
greater emphasis on solutions to specific problems than detailed modeling.
Quantitative analysis is used extensively by asset and investment managers. They rely almost
exclusively on quantitative strategies while others, use a mix of quantitative and fundamental
methods. Major firms invest large sums in an attempt to produce standard methods of
evaluating prices and risk.
Quantitative analysis has grown in importance in recent years, as the credit crisis exposed
holes in the mechanisms used to ensure that positions were correctly hedged, though in no
bank does the pay in risk approach that in front office. A core technique is value at risk, and this
is backed up with various forms of stress test (financial), economic capital analysis and direct
analysis of the positions and models used by various bank's divisions.

In the aftermath of the financial crisis, there surfaced the recognition that quantitative
valuation methods were generally too narrow in their approach. An agreed upon fix adopted
by numerous financial institutions has been to improve collaboration.
Because of their backgrounds, quantitative analysts draw from three forms of mathematics:
statistics and probability, calculus centered around partial differential equations, and
econometrics. Some on the buy side may use machine learning. The majority of quantitative
analysts have received little formal education in mainstream economics, and often apply a
mindset drawn from the physical sciences. Physicists tend to have significantly less focus on
statistical techniques, and thus lean on approaches based upon partial differential equations,
and solutions to these based upon numerical analysis.
A typical problem for a statistically oriented quantitative analyst would be to develop a model
for deciding which stocks are relatively expensive and which stocks are relatively cheap. The
model might include a company's book value to price ratio, its trailing earnings to price ratio,
and other accounting factors. An investment manager might implement this analysis by
buying the underpriced stocks, selling the overpriced stocks, or both.
Statistically oriented quantitative analysts tend to have more of a reliance on statistics and
econometrics, and less of a reliance on sophisticated numerical techniques and object-oriented
programming. These quantitative analysts tend to be of the psychology that enjoys trying to
find the best approach to modeling data, and can accept that there is no right answer until
time has passed and we can retrospectively see how the model performed.

About the Speaker:


Dr. Forster Kum-Ankama Sarpong started managing financial and realty projects and
teams in 2001. He is the CEO of Design Resources Estates, All Ghana Microfinance and a
lecturer in Finance and Quantitative Models. (T): 024 4321960 (E): fosarpong@yahoo.com