The New Financial Reality
Lead Research Organisation:
University of Kent
Department Name: Kent Business School
Abstract
The recent financial crises led to new risks, measures of risk and asset classes coming into the spotlight; the degree of interconnectedness of financial institutions is also now given its due attention. The proposed seminar series aims to give an overview of this new financial reality, with sessions on new risks, new asset classes, as well as new measures of risk and risk transmission mechanisms.
The series also aims to establish links not only between the four institutions which would be hosting events (two UK and two international), but also between academia and the financial industry. This is of particular importance since, while innovation in the modelling of financial activity and risks takes place in academia, product innovation is always led by the practice. The proposed seminar series could help create a forum where academics can benefit from learning about the latest developments in the markets and practitioners can become accustomed with the state of art in financial modelling. Furthermore, we also aim to build an agenda that would give all participants, but Early Career Researchers in particular, the possibility to interact and get feedback from the top experts in the areas of research in finance which are currently of the utmost importance to practitioners.
The first seminar will focus on systemic risk - broadly, the risk of failure of an entire or significant part of a financial system. Following the recent crises, this type of risk has been at the forefront of the agenda for finance academics, practitioners and regulators alike. The seminar aims to present a critical overview of the prominent existing approaches for measuring and managing systemic risk, with inputs from both academia and the financial industry. Another type of risk which became prominent post-crisis is liquidity risk: the liquidity dry-up which followed the initial crisis which started in the sub-prime sector of the American mortgage market was an important factor in the transition from a crisis which affected solely the financial sector to a global economic crisis, which led to significant financial instability. The second seminar will tackle the impact of liquidity on financial stability.
The focus of the third seminar will be on investment and trading strategies involving volatility derivatives. Much of the recent development in this asset class is motivated by a number of studies, which are in-line with widely-held practitioners' beliefs, and which showed that these instruments would have proved very efficient in reducing the risk of equity portfolios during the crisis. Given that financial product innovation comes from the financial practice, the participation of representatives from various financial institutions (including exchanges, central banks, regulators as well as investment banks) to this seminar is of particular relevance.
There has been much debate in recent years whether the drawbacks of the most widely used measure of risk (Value-at-Risk) have played a role in the crisis; a new set of banking regulation guidelines stipulate replacing it with another measure (Expected Shortfall). Support for this change is however only partial, with practitioners highlighting the higher computational cost of the new measure and with some academics highlighting that its theoretical superiority over Value-at-Risk may not be absolute. Seminar 4 will provide an in-depth analysis of existing risk measures as well as propose regulatory solutions.
The importance of the interdependence of the global financial system cannot be understated: had the original sub-prime crisis been contained in the sub-prime mortgage sector, we would not have witnessed the global economic crisis that ensued. Seminar 5 will therefore focus on the appropriate modelling of the dependence between asset classes and markets and Seminar 6 will serve as a round-up and give further opportunities to explore linkages between the topics presented in previous seminars.
The series also aims to establish links not only between the four institutions which would be hosting events (two UK and two international), but also between academia and the financial industry. This is of particular importance since, while innovation in the modelling of financial activity and risks takes place in academia, product innovation is always led by the practice. The proposed seminar series could help create a forum where academics can benefit from learning about the latest developments in the markets and practitioners can become accustomed with the state of art in financial modelling. Furthermore, we also aim to build an agenda that would give all participants, but Early Career Researchers in particular, the possibility to interact and get feedback from the top experts in the areas of research in finance which are currently of the utmost importance to practitioners.
The first seminar will focus on systemic risk - broadly, the risk of failure of an entire or significant part of a financial system. Following the recent crises, this type of risk has been at the forefront of the agenda for finance academics, practitioners and regulators alike. The seminar aims to present a critical overview of the prominent existing approaches for measuring and managing systemic risk, with inputs from both academia and the financial industry. Another type of risk which became prominent post-crisis is liquidity risk: the liquidity dry-up which followed the initial crisis which started in the sub-prime sector of the American mortgage market was an important factor in the transition from a crisis which affected solely the financial sector to a global economic crisis, which led to significant financial instability. The second seminar will tackle the impact of liquidity on financial stability.
The focus of the third seminar will be on investment and trading strategies involving volatility derivatives. Much of the recent development in this asset class is motivated by a number of studies, which are in-line with widely-held practitioners' beliefs, and which showed that these instruments would have proved very efficient in reducing the risk of equity portfolios during the crisis. Given that financial product innovation comes from the financial practice, the participation of representatives from various financial institutions (including exchanges, central banks, regulators as well as investment banks) to this seminar is of particular relevance.
There has been much debate in recent years whether the drawbacks of the most widely used measure of risk (Value-at-Risk) have played a role in the crisis; a new set of banking regulation guidelines stipulate replacing it with another measure (Expected Shortfall). Support for this change is however only partial, with practitioners highlighting the higher computational cost of the new measure and with some academics highlighting that its theoretical superiority over Value-at-Risk may not be absolute. Seminar 4 will provide an in-depth analysis of existing risk measures as well as propose regulatory solutions.
The importance of the interdependence of the global financial system cannot be understated: had the original sub-prime crisis been contained in the sub-prime mortgage sector, we would not have witnessed the global economic crisis that ensued. Seminar 5 will therefore focus on the appropriate modelling of the dependence between asset classes and markets and Seminar 6 will serve as a round-up and give further opportunities to explore linkages between the topics presented in previous seminars.
Planned Impact
Our objective is for the seminar series to be of significant benefit to two main groups. First, practitioners from various areas of the financial industry will be invited to attend (and some of them to present at) the seminars. The seminar series will serve as an opportunity for practitioners to exchange knowledge and ideas on the rapidly evolving financial landscape with other professionals and academics in similar or different fields. Our ambition is for the seminar series to offer a forum that stipulates a critical reflection on the current financial and economic paradigms as well as a meaningful discussion on future directions. The practitioners who participate in the seminar series will also benefit from attending presentations and discussing the cutting edge of academic research in their respective fields. We expect that some of the issues that will be discussed in the seminar series will then inform their professional practice, hopefully contributing towards a better understanding of the New Financial Reality that has begun to emerge.
Second, we intend for the seminar series to be of benefit to policy makers. Some of the non-academic speakers and discussants will be invited from institutional organizations in the financial sector (such as the Bank of England and the European Central Bank). The seminars will provide an opportunity for policy makers to share a common forum with academics and practitioners in the financial industry, contributing towards the formers' evaluation of recent developments. Ultimately, we expect that the seminars will help policy makers draw ideas and insights from the interaction with academics and practitioners, which they could consider when setting their own policy agendas.
Finally, even though attending the seminars will be on an invitation-only basis, the seminar materials will be freely available online. This will allow the wider community of academics, practitioners and policy makers to benefit from the robust discussion of the new financial environment that will take place during the seminars. Obviously, the online seminar materials will also be available to the general public (in both technical and non-technical form), which we expect to benefit from a debate among leading experts on relevant issues that have a significant impact on the economy as a whole as well as on individual consumers.
Drawing from the organizing committee's existing list of contacts, we will invite representatives from the following institutions to the seminars:
- Bank of England (Nicholas Fawcett - Senior Economist - Monetary Analysis & Structural Economic Analysis Division)
- European Central Bank (Vincent Brousseau & Alain Durre - Principal Economists)
- Deutsche Bundesbank (Norbert Metiu - Economist - Forecasting in Economics and Finance & Financial Stability Research Group)
- De Nederlansche Bank (Robert Vermeulen - Economist - Economics and Research Division)
- Eurex (Stuart Heath - Executive Director)
- BlackRock (Ralph Smith - Head of Fixed Income Research)
- Deutsche Bank (Carmen Firescu - VP)
- ICE IntercontinentalExchange (Andreza Barbosa - Director)
- ING Investment Bank (Ioannis Theodoropoulos - CVA Desk Quant)
- JP Morgan (Nikolaos Panigirtzoglou - Strategist - Asset allocation)
- Societe Generale (Mirela Mandare & Nikos Prepalas - VP Structured Products Marketing & VP Emerging Markets Institutional Sales)
- UBS Investment Bank (Gregory Kolokouris - Director Desk Quant)
- Millenium Partners hedge fund (Anca Dimitriu - Managing Director)
- Fulcrum Asset Management (Stamatis Leontsinis - Portfolio Manager)
- Center for Pacific Basin Studies International Research (Mark Spiegel - VP & Director)
Second, we intend for the seminar series to be of benefit to policy makers. Some of the non-academic speakers and discussants will be invited from institutional organizations in the financial sector (such as the Bank of England and the European Central Bank). The seminars will provide an opportunity for policy makers to share a common forum with academics and practitioners in the financial industry, contributing towards the formers' evaluation of recent developments. Ultimately, we expect that the seminars will help policy makers draw ideas and insights from the interaction with academics and practitioners, which they could consider when setting their own policy agendas.
Finally, even though attending the seminars will be on an invitation-only basis, the seminar materials will be freely available online. This will allow the wider community of academics, practitioners and policy makers to benefit from the robust discussion of the new financial environment that will take place during the seminars. Obviously, the online seminar materials will also be available to the general public (in both technical and non-technical form), which we expect to benefit from a debate among leading experts on relevant issues that have a significant impact on the economy as a whole as well as on individual consumers.
Drawing from the organizing committee's existing list of contacts, we will invite representatives from the following institutions to the seminars:
- Bank of England (Nicholas Fawcett - Senior Economist - Monetary Analysis & Structural Economic Analysis Division)
- European Central Bank (Vincent Brousseau & Alain Durre - Principal Economists)
- Deutsche Bundesbank (Norbert Metiu - Economist - Forecasting in Economics and Finance & Financial Stability Research Group)
- De Nederlansche Bank (Robert Vermeulen - Economist - Economics and Research Division)
- Eurex (Stuart Heath - Executive Director)
- BlackRock (Ralph Smith - Head of Fixed Income Research)
- Deutsche Bank (Carmen Firescu - VP)
- ICE IntercontinentalExchange (Andreza Barbosa - Director)
- ING Investment Bank (Ioannis Theodoropoulos - CVA Desk Quant)
- JP Morgan (Nikolaos Panigirtzoglou - Strategist - Asset allocation)
- Societe Generale (Mirela Mandare & Nikos Prepalas - VP Structured Products Marketing & VP Emerging Markets Institutional Sales)
- UBS Investment Bank (Gregory Kolokouris - Director Desk Quant)
- Millenium Partners hedge fund (Anca Dimitriu - Managing Director)
- Fulcrum Asset Management (Stamatis Leontsinis - Portfolio Manager)
- Center for Pacific Basin Studies International Research (Mark Spiegel - VP & Director)
Organisations
| Description | The primary objective of the New Financial Reality project was to explore the new and continuously shifting financial landscape that has begun to emerge after the recent financial crisis. This objective was achieved by developing an international network of academics, practitioners and policy-makers with significant expertise in measuring and managing risk. The New Financial Reality seminar series provided a forum where experts in the various aspects of risk in financial markets were able to meet, present their research, exchange opinions and identify important questions for future research. One of the main findings of the seminar series relates to the importance of systemic risk. A large number of presentations focused on the issue of accurately measuring systemic risk and, ultimately, identifying Systemically Important Financial Institutions (SIFIs) in an efficient way. Starting from a consensus on the fact that the importance of systemic risk has perhaps not been fully recognized so far, seminar participants presented a range of methodological innovations that could improve the accurate measurement of systemic risk. These novel methodologies could potentially enhance regulators' ability to predict shocks to the financial system and take corrective measures as early as possible. Another key finding of the seminar series refers to the ever-increasing interconnectedness in global financial markets. The papers that were presented in the seminars highlighted how interconnectedness in the financial system has been consistently underestimated, even during the financial crisis. As a result, new methods need to be developed to measure and forecast the transmission of risk across markets, with seminar participants presenting a number of frameworks that could improve our understanding of the transmission/contagion channels among financial markets. Finally, the seminar series highlighted the need for a better understanding of volatility in financial markets. To this end, participants in the New Financial Reality network presented novel methodologies of measuring and forecasting volatility, as well as higher moments of financial assets. |
| Exploitation Route | The New Financial Reality project established a network of academics, practitioners and policy-makers on the challenges being faced in the new financial landscape that has begun to emerge. In addition to evaluating specific solutions to a number of research questions relating to measuring and managing risk, the seminar series also identified areas for future research. We envisage that the research that was presented in the seminar series will be taken forward by academics working in the general area of risk management. The papers that were presented in the seminars identified several avenues for future research, and we hope that the material from the series will inspire researchers to further improve our understanding of risk in the financial system. We also expect that practitioners and policy-makers could adopt some of the methodological innovations that have been proposed during the seminars. For instance, policy-makers could be interested in adding some of the proposed frameworks in their toolboxes for evaluating systemic risk. Similarly, we expect practitioners to be interested in adopting some of the methodological advances in measuring and forecasting volatility and dependence in financial markets. |
| Sectors | Communities and Social Services/Policy,Financial Services, and Management Consultancy |
| URL | https://blogs.kent.ac.uk/kbs-news-events/2014/03/the-new-financial-reality/ |
| Description | There is no impact to date but this will be updated in the future when this develops. |