Quantitative Investing

Kerry Back

Security analysts

Sell-side analysts work for brokerage firms and provide research to brokerage clients.
- They are a cost center and research is provided free to generate business (= commissions or advising fees).
Buy-side analysts work for investment funds who use the research to pick stocks.

Technical versus fundamental

Fundamental analysts forecast important ratios and growth rates to produce earnings forecasts and price targets as in Gordon/Dupont.
Technical analysts use past prices to generate recommendations.

Technical analysis examples

Support and resistance levels.
- Previous minimum (support) and maximum (resistance) stock prices are regarded as difficult to breach.
- But if breached, the trend is expected to continue.
Moving averages: buy when price rises above moving average and sell when it falls below.
Chart patterns (head and shoulders, …)

Quantitative Investing

Quantitative investing means using quantifiable signals to pick stocks and/or to time the market.
Signals can include ratios and growth rates used by fundamental analysts and price signals used by technical analysts.
Signals can also include
- insider trades, short interest, …
- sentiment analysis of social media, traditional media, and company announcements
- satellite and drone image data, and …

Efficient Markets Hypothesis

All relevant information is already impounded into prices.
- Fundamental analysis is futile.
- Technical analysis is futile.
Higher expected returns come only with higher risks: arket risk (beta) and/or other types of risks (oil price, …)

Counter-argument

Not all investors are smart
Smart investors may not scoop up all opportunities
- Limited capital
- Costs of trading
- For example, an investor who shorts risks running out of capital from margin calls before being eventually right.
More likely to be opportunities among smaller stocks, which are difficult for large investors to trade.