Financial Mathematics

COMMENT

A calculated approach

The ability to apply mathematical and scientific knowledge to financial analysis holds the key to helping organisations navigate a looming recession, and that’s where “quants” come in

The geopolitical and economic storm spurred by the Covid-19 pandemic over the past two years has sent unprecedented shockwaves across financial institutions, fintechs, hedge funds, banks and insurance companies.

Globally, as some governments attempt to revitalise their economies, several major markets are still teetering on the edge of recession, with organisations in the financial sector scrambling to find the answers to their most pressing questions.

The compass that will guide many of these companies through choppy waters and help avert future market crashes will be quantitative financial analysis.

By combining state-of-the-art mathematical methods, computational skills and programming expertise, quantitative financial analysts, known as “quants”, work to develop and implement complex mathematical models that help financial firms and investors make informed decisions around risk management, investment opportunities and pricing.

Part speculator, part ruthless logician, quantitative analysts also adopt a disciplined approach to trading and valuing assets, with the aim of reducing risk and generating profits.

A HISTORICAL PERSPECTIVE

The quantitative analysis movement started in the 1950s with the introduction of Nobel Prize-winning economist Harry Markowitz’s modern portfolio theory (MPT), which showed investors how to construct a diversified portfolio of assets capable of maximising returns for various risk levels. In the 1990s, the emergence of computers made it possible to crunch enormous volumes of data in extraordinarily short periods of time, advancing the field significantly.

Today, quant strategies have gained notable attention for their role in high-frequency trading (HFT) that relies on increasingly complex quantitative trading strategies, in which traders seek to identify consistent patterns, model those patterns, and use them to predict price movements in securities.

It’s clear that technology has forever changed the world of investing and financial resilience. Not only can it grant companies a distinct advantage in an increasingly competitive world. But in today’s complex and rapidly changing economic environment, financial players and organisations who fail to incorporate the power of mathematics and science in their financial approach and analysis are destined to be left behind.

GROWING RELEVANCE

With this in mind, I foresee the demand for quantitative financial analysts rising both rapidly and exponentially in the future. Indeed, with increasingly complex financial securities, and the challenging nature of the work, there is great demand for quant professionals who understand the complex mathematical models that price these securities.

Quantitative financial analysis is a highly competitive field requiring individuals with multifaceted skills, tremendous financial knowledge, and the right temperament. Alongside an all-encompassing understanding of finance and experience in programming, mathematics, and trading, a great majority of firms require at least a master’s degree, or preferably a doctorate, in a quantitative subject (mathematics, economics, finance or statistics) or financial mathematics as a prerequisite for this career path.

That being said, finding individuals with these skills is a challenge for companies. This puts those with the unique tools and knowledge possessed by quantitative financial analysts in an elevated position in today’s job market.

With the world still at risk of facing a recession in 2023, and a string of financial crises being seen across emerging markets and developing economies, companies have never been so eager to employ analysts with the skills to anticipate risk, protect them, as well as capitalise on emerging opportunities.

Dr Monita Baruah, associate professor and programme director of MSc in financial mathematics, University of Birmingham Dubai