Quantitative data analysis in finance

Abstract

Quantitative tools have been widely adopted in order to extract themassive information from a variety of financial data. Mathematics, statistics and computers algorithms have never been so important to financial practitioners in history. Investment banks develop equilibrium models to evaluate financial instruments; mutual funds applied time series to identify the risks in their portfolio; and hedge funds hope to extract market signals and statistical arbitrage from noisy market data. The rise of quantitative finance in the last decade relies on the development of computer techniques that make processing large datasets possible. As more data is available at a higher frequency, more researches in quantitative finance have switched to the microstructures of financial market. High frequency data is a typical example of big data that is characterized by the 3V's: velocity, variety and volume. In addition, the signal-to-noise ratio in financial time series is usually very small. High frequency datasets are more likely to be exposed to extreme values, jumps and errors than the low frequency ones. Specific data processing techniques and quantitative models are elaborately designed to extract information from financial data efficiently. In this chapter, we present the quantitative data analysis approaches in finance. First, we review the development of quantitative finance in the past decade. Then we discuss the characteristics of high frequency data and the challenges it brings. The quantitative data analysis consists of two basic steps: (i) data cleaning and aggregating; (ii) datamodeling.We review themathematics tools and computing technologies behind the two steps. The valuable information extracted from raw data is represented by a group of statistics. The most widely used statistics in finance are expected return and volatility, which are the fundamentals of modern portfolio theory. We further introduce some simple portfolio optimization strategies as an example of the application of financial data analysis. Big data has already changed financial industry fundamentally; while quantitative tools for addressing massive financial data still have a long way to go. Adoptions of advanced statistics, information theory, machine learning and faster computing algorithms are inevitable in order to predict complicated financial markets. These topics are briefly discussed in the later part of this chapter.