Handbook of Finance: Investment Management and Financial Management

Chapter 5. Quantitative Investment Management: Today and Tomorrow

PETTER N. KOLM, PhD

Clinical Associate Professor and Deputy Director of the Mathematics in Finance M.S. Program, Courant Institute, New York University

SERGIO M. FOCARDI

Partner, Intertek Group

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

DESSISLAVA A. PACHAMANOVA, PhD

Assistant Professor of Operations Research, Babson College

Abstract: More and more quantitative models have started to find their way into the investment management industry. Typically, the quantitative efforts at firms start with risk management functions and portfolio optimization. Needless to say, there are many areas beyond these were quantitative methods are valuable. First, for example, the usage of equity derivatives allow investors to change the risk and return characteristics of their equity investment portfolio. Second, in international portfolios, beyond asset specific risk, portfolio managers are faced with currency risk and have to decide on how much of this risk they want to hedge. Quantitative optimization tools can be very helpful in dealing with both of these issues. Quantitative forecasting tools are increasing in importance. Momentum, reversals, and regression-based strategies have traditionally been the "bread and butter" for many traders, but other more sophisticated econometric techniques are now being used more broadly such as vector autoregressive models, dynamic factor and state space ...