What Is Quantitative Analysis?
Quantitative analysis is a number and data-driven approach to investing that uses mathematical models and algorithms to analyze a company’s financial information to inform investment decisions. It’s part of fundamental analysis, which is divided into quantitative and qualitative analyses. This article focuses on quantitative analysis on equities.
What Is Quantitative Data?
In terms of the stock market and investing in publicly traded companies, quantitative data refers broadly to a company’s financials and stock price activity. A company reports its financial statements to the Securities and Exchange Commission on quarterly and annual bases. The income statement includes revenue, cost of goods sold, and net income, which are considered quantitative data.
Some of the components found within the income statement such as revenue and net income can be used in the calculation of metrics like gross profit margin and price-to-earnings ratio. Analysts can gather historical data, typically years of information, and create mathematical and statistical models based on the collected data. Other metrics include projected earnings growth (P.E.G.) ratio and dividend payout ratio.
Since a company’s stock is traded on an exchange, investors and analysts also look at other types of quantitative data, such as trading volume.
A Brief History of Quantitative Analysis
Quantitative analysis can trace its origins to the 1934 publication of the book Security Analysis by Columbia Business School professors Benjamin Graham and David Dodd. Their work influenced many investors, including Warren Buffett, who uses a combination of quantitative and qualitative analyses in his investment decisions.
With the rise of personal computers and spreadsheets in the 1980s, hedge funds with a quantitative analysis approach to investing opened shop. One of the pioneers in quantitative analysis is James Simons, a mathematician who founded Renaissance Technologies in Long Island, New York, in 1982. Another is David E. Shaw, a computer scientist who started his eponymous money management firm, D.E. Shaw & Company, in 1988.
As technology advanced further into the 21st century, quantitative strategies became more widespread. Some hedge funds employ high-frequency trading as part of their quantitative strategy to seek out inefficiencies in trading.
How Is Quantitative Data Used for Analysis?
Analysts compile quantitative data and use them to make statistical or mathematical models to look for patterns, or input them into algorithms for a particular outcome.
For example, a hedge fund analyst looking at a company in manufacturing might examine the company's historical data, namely revenue and earnings, and track its stock price movement. The analyst could then create a model to estimate the company’s valuation, which would help the fund make decisions about when to buy and sell the stock. Analysts might also look at creating specific models to measure risk and return.
Quantitative Analysis vs. Qualitative Analysis
Quantitative analysis looks at some of the same factors as qualitative analysis (like revenue and net income) but takes a different approach in their analysis. While a qualitative analyst might look at how a company’s earnings are growing based on the company’s prospects with a forward-facing outlook on the economy, a quantitative analyst might look at earnings on a historical basis without regard to how the company’s profit is shaped by consumer spending and such, instead looking for patterns or trends that could predict future profitability.
What Skills Should a Quantitative Analyst Have?
A quantitative analyst should be skilled at working with numbers, which typically entails having a background in mathematics, statistics, finance, or computer science. They should be particularly knowledgeable about working with algorithms and mathematical and statistical models in order to analyze quantitative data and make investment decisions based on this analysis.
