Quantitative analysis provides some of the greatest tools available to help us explain the world at large. As a method or process, QA gives analysts means by which they can observe and interpret what has happened, is happening, or might happen in the world. With the right tools, analysts can explain why people and even things behave the way they do, and with the right approach, they can even even anticipate what is to come.
What is Quantitative Analysis?
In its broadest sense, quantitative analysis is the use of numerical information to make sense of a small part of the world. In other words, QA investigates and uncovers quantifiable data in a specific area and then uses that data to interpret a situation, a certain behavior, or even an entire cultural or political movement. QA measures the outputs of a given situation and then seeks to understand exactly what those outputs mean. Once an analyst reaches a reasonable understanding, he or she then usually tries to find a pattern in order to predict what happens next.
Numbers are present in every facet of life, so almost any subject can be quantified in some way. That is why quantitative analysis can be found in so many fields. Financial analysts and consultants use it to track stock prices, determine investments and monitor the market. Social scientists use numerically significant empirical tests and observation to create and test hypotheses of political and social behavior. Even sports fans use QA to better understand the highs and lows of their favorite sports stars' careers.
Historical Background of QA in Finance
Most people agree that Harry Markowitz was one of the first to apply a solid theory of mathematical concepts to finance in 1952. He developed a quantifiable concept of diversification, using statistics to prove his theory. Shortly thereafter the concept spread to the social sciences by way of economic theory. By the 1960s the use of quantitative analysis dominated both financial analysis and the social sciences as a more empirical means of explaining and predicting social and economic behavior.
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Following Markowitz's theory of diversification, in 1969 Robert Merton applied stochastic calculus to understand what prices actually indicate and how they are set by a combination of producers and consumers. That single indicator condensed hundreds of transactions into a single unit of information . The same could be said of all prices, and using calculus and statistics could help markets in general and stock trading in specific become more efficient and profitable.
Expanding the Sphere
Using complex algorithms and constantly shifting data, financial analysts help determine individual and corporate investment risks. Analysts use mathematical and statistical modeling to condense vast amounts of data into simpler predictive equations and econometric outputs to help identify courses of action when it comes to investments and trading. Quantitative analysis is now used in investment management, trading in derivatives, risk management, credit analysis, and portfolio optimization.
Numbers make the world go round, and the ones who understand these numbers are the ones determining our rotation. Quantitative analysts use their available skills and tools to dissect, describe, and discern the world around them. In these complex economic times, quantitative analysis can be a significant and dominant tool as analysts help detect, determine, and,maybe even help direct which companies succeed and which ones fail.