Nerds on Wall Street: Math, Machines, and Wired Markets

5.3. What Do Quantitative Managers Do?

What are these people with the computers doing if they haven't gone and kicked the tires and had lunch with the CEO? This is a good question. We all know of many factors that one can consider when making an investment decision. For example, if there was a sudden increase in the price of oil, one would be more likely to invest in oil companies than airlines. If there was a sudden increase in interest rates, one would be more disposed to invest in companies with less floating debt than those with a substantial amount. If the dollar weakens against foreign currencies, one would be less inclined to invest in firms with a substantial amount of income from foreign sources, or supplies from foreign sources. These are general characteristics that one could apply across many industries. There are also specific industries that one would favor in response to say, a change in housing standards or oil price. A quick scan of the investment section in any large bookstore would yield a wide variety of other theories on how to pick strong stocks and avoid weak ones. Quantitative methods provide a means to verify and combine many of these theories.

Earnings are probably the most important single factor affecting stock prices. When the analysts make their forecasts to indicate their expectations of better earnings, it can often move a stock price up. A surprise announcement of better (or worse) than expected earnings is typically followed by a corresponding ...