He was able to create a system, known broadly as card counting, which used probability theory and statistical analysis to successfully win blackjack games. Considered the "Father of Quantitative Investing", Thorp sought to predict and simulate blackjack, a card-game he played in Las Vegas casinos. Modern quantitative investment management was first introduced from the research of Edward Thorp, a mathematics professor at New Mexico State University (1961–1965) and University of California, Irvine (1965–1977). Although the language of finance now involves Itō calculus, management of risk in a quantifiable manner underlies much of the modern theory.
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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. Markowitz formalized a notion of mean return and covariances for common stocks which allowed him to quantify the concept of "diversification" in a market. 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).
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. įurther information: Mathematical finance § Derivatives pricing: the Q world, Financial economics § Derivative pricing, and § Seminal publications Some of the larger investment managers using quantitative analysis include Renaissance Technologies, D. 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. The resulting strategies may involve high-frequency trading.Īlthough 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. 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). The occupation is similar to those in industrial mathematics in other industries. Quants tend to specialize in specific areas which may include derivative structuring or pricing, risk management, algorithmic trading and investment management. Those working in the field are quantitative analysts ( quants). Quantitative analysis is the use of mathematical and statistical methods in finance and investment management.
Use of mathematical and statistical methods in finance
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