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Quantitative Finance

The use of mathematical models and extremely large data sets to analyze financial markets and securities

What is Quantitative Finance?

Quantitative finance is the use of mathematical models and extremely large datasets to analyze financial markets and securities. Common examples include (1) the pricing of derivative securities such as options, and (2) risk management, especially as it relates to portfolio management applications. Professionals who work in quantitative finance are often referred to as “Quants.”

 

Quantitative Finance Diagram

 

Learn more in CFI’s Financial Analyst Training Courses.

 

Quantitative Finance vs Financial Engineering

Quantitative finance focuses on the mathematical models used to price securities and measure risk. Financial engineering goes on step further to focus on applications and build tools that will implement the results of the models.

Financial engineering combines the mathematical theory of quantitative finance and with computational simulations to make price, trade, hedge, and make other investment decisions.

 

Quantitative Analysts

A quantitative analyst uses mathematical models and applies them to financial markets in order to support the trading and risk management departments that operate in banks and financial institutions.

A career as a quant requires a strong background in math, with analysts often getting advanced degrees such as Master’s or Ph.D.’s in the field. These types of jobs are much less common than traditional financial analysts who work across the finance industry.

Specifically, quantitative finance analysts need to understand:

  • Algorithms
  • C++
  • Differential equations
  • Linear algebra
  • Multi-variable calculus
  • Probability theories
  • Statistical analysis

 

Most large banks and financial institutions have quantitative analysts working in either operations or information technology (IT) departments, which means there are numerous career opportunities available. Smaller, boutique firms typically don’t have such analysts, so you’ll want to focus on the bulge bracket banks and other large institutions in your career search.

 

Additional Resources

Thank you for reading this guide to quantitative finance and understanding what it consists of, as well as why it matters to large institutions. CFI’s mission is to help you advance your career, and with that goal in mind, these additional resources will be a big help:

  • Equity Risk Premium
  • High-Frequency Trading (HFT)
  • Spoofing
  • Systematic Risk

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