Quant 4.0: engineering quantitative investment with automated, explainable, and knowledge-driven artificial intelligence

Abstract

Quantitative investment (abbreviated as “quant” in this paper) is an interdisciplinary field combining financial engineering, computer science, mathematics, statistics, etc. Quant has become one of the mainstream investment methodologies over the past decades, and has experienced three generations: quant 1.0, trading by mathematical modeling to discover mis-priced assets in markets; quant 2.0, shifting the quant research pipeline from small “strategy workshops” to large “alpha factories”; quant 3.0, applying deep learning techniques to discover complex nonlinear pricing rules. Despite its advantage in prediction, deep learning relies on extremely large data volume and labor-intensive tuning of “black-box” neural network models. To address these limitations, in this paper, we introduce quant 4.0 and provide an engineering perspective for next-generation quant. Quant 4.0 has three key differentiating components. First, automated artificial intelligence (AI) changes the quant pipeline from traditional hand-crafted modeling to state-of-the-art automated modeling and employs the philosophy of “algorithm produces algorithm, model builds model, and eventually AI creates AI.” Second, explainable AI develops new techniques to better understand and interpret investment decisions made by machine learning black boxes, and explains complicated and hidden risk exposures. Third, knowledge-driven AI supplements data-driven AI such as deep learning and incorporates prior knowledge into modeling to improve investment decisions, in particular for quantitative value investing. Putting all these together, we discuss how to build a system that practices the quant 4.0 concept. We also discuss the application of large language models in quantitative finance. Finally, we propose 10 challenging research problems for quant technology, and discuss potential solutions, research directions, and future trends.

Keywords

Artificial general intelligence / Artificial intelligence / Automated machine learning / Causality engineering / Deep learning / Feature engineering / Investment engineering / Knowledge graph / Knowledge reasoning / Knowledge representation / Model compression / Neural architecture search / Quant 4.0 / Quantitative investment / Risk graph / Explainable artificial intelligence

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2024 Zhejiang University Press