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What Is Quantitative Financial Analysis?

By John Lister
Updated May 17, 2024
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Quantitative financial analysis is the practice of using mathematics, particularly statistics, to make financial assessments. Examples include using a formula to produce a more objective valuation of a financial asset. It's important to note that although quantitative financial analysis is fundamentally an application of objective techniques, the selection of which factors to consider is itself somewhat subjective. This means that although mathematics is used, there is no perfect system; instead, quantitative analysis theoretically becomes more accurate over time as analysts learn from mistakes and get more data to work from.

Virtually every investor, whether an individual or an institution, uses quantitative financial analysis to some degree. This can take very simple forms, such as the price/earnings ratio, which compares the market cost of a stock with the profitability of the company involved. Usually, though, the term quantitative analysis is used for specialists with a high degree of skill in relevant branches of mathematics.

The work of a quantitative financial analyst can be particularly useful with derivatives. These are financial assets such as options contracts that do not have inherent worth themselves but instead derive their value from one or more other assets. There are a wide range of factors that could affect the value of an options contract, including the price of the underlying asset, the trend of the asset's price, how much the asset price has varied, how long the contract has left before the option comes due, and even how much money an investor could make by instead putting his money into a low-risk or zero-risk investment. An analyst will try to develop the most accurate way to assess the relative importance of these factors and thus find a more objective assessment of the options contract's value. If the analysis is correct, then buying the options contract at a more favorable price will statistically have a better than even chance of paying off.

As the name suggests, quantitative financial analysis does not cover subjective factors that may commonly be used in making investment decisions. For example, if a CEO who has a high public profile from appearances as a media commentator is appointed to a new company, some investors may believe it will improve the company's performance and buy the stock. Another subjective case would be an investor who regularly uses an airline and is satisfied with its performance investing in the stock as he believes the company is likely to be stable. A quantitative analyst would not inherently take such factors into account unless they could be measured and proven.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

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