Financial Modelling Post-2008: Where Next?

Lead Research Organisation: University of Leicester
Department Name: School of Management


Empirical finance is concerned with the analysis of financial data of a variety of sorts (in different time formats for instance). This type of analysis uses applied statistical techniques to shed light on some particular financial problem (such as how to determine the level of compensation for risk of a class of assets). Mathematical finance is interested in using applied (and pure) mathematics in the construction of financial models. The area of stochastic mathematics has been instrumental in formulating essential theories in the area of asset pricing (for instance the formulation of exact conditions under which no riskless profits can occur).
The seminar series will address issues related to both empirical and mathematical finance. Two essential concepts which underlie modern finance research are the so called distributional assumptions one makes of certain financial variables and the idea of so called 'financial efficiency'. To give an example of the first essential concept, distributional assumption, consider the price of an asset (any asset) over a period of time. Assume that we have gathered sufficient data on the price of this asset, and assume that the price of such an asset has a probability density function (i.e. a function which indicates the probability that the asset price will be more or less than a certain given value). In many finance models, the assumption of such probability density function will be of the so called Normal density type. As an example, the famous Black-Scholes option pricing theory uses the assumption that the price of an asset has a (log)normal density. As another example, basic value at risk models will assume that portfolio changes are normally distributed. The 2008 crisis and the events following that crisis have shown that such distributional assumptions may be very erroneous. The objective of this seminar series consists in assessing how such distributional assumptions have affected empirical and mathematical finance modelling, after the 2008 crisis. The seminar series will consider how different distributional assumptions can penetrate some basic financial models (whether they are at the empirical or mathematical finance level).
An important financial crisis like the 2008 crisis is very rare but probably more frequent than some of the basic financial models led us to believe. Our seminar series will investigate how extreme events can be modelled and by so doing it wants to dispel the current myth that financial models are just wrong across the board.
Finally, the series would not be complete without considering the historical and legal causes of the 2008 crisis. It is within the light of those historical and legal causes that we want to position the research envisioned by the running of those series of seminars.

Planned Impact

Who will benefit? The following parties will benefit from the series:
+Academics in banking and finance, sociology of finance, business, financial and economic history, and in general academics that have an interest in understanding some of the essentials which relate to the 2008 crisis.
+Senior policy makers and advisers from the government, Bank of England, Financial Stability Authority and other financial institutions
+Financial journalists
+Early career researchers
+Doctoral students

How will they benefit?
We will invite members of the above communities to attend different sessions, also as a presenter or discussant, to encourage interaction and knowledge transfer between the different parties. The seminar series will provide a forum for the exchange and development of theoretical, empirical and policy ideas, and function as a primary mechanism for disseminating findings, and most importantly it will facilitate communication and exchange of information between experts from academia, finance professionals, central bankers and early career researchers and doctoral students. The book and special volume in a leading finance journal will collect selected papers. We have set aside a part of the budget for the funding of 1 hotel night for 6 doctoral students. We also have set aside a budget for the funding of subsistence for 6 early career researchers and 6 doctoral students (over the four 2-day seminars we intend to organize). Finally, we are adamant about setting up a special section entitled 'The future of Post-2008 Financial Modelling: the non-academic point of view' on the website at the Institute of Finance, of the University of Leicester ( This special section will serve a dual purpose. First, it will be used to further engage (after all the four 2-day seminars are over) on the issues discussed and debated at the four 2-day seminars. The emphasize will be on issues which are relevant to non-academics and practitioners. Second, the special section will serve as a repository of talks which will be held at the Institute of Finance under the topic of 'The future of Post-2008 Financial Modelling: the non-academic point of view'. Those talks will have the defining characteristic they will all be given by non-academics. Please note that those talks will follow after all the four 2-day seminars are over. The website will be clearly accessible to the wider non-academic public.


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Description Under this seminar series grant we were able to hold four seminars on the four themes we had intended.

Theme I: Historical and legal origins of the 2008 crisis (hosted at Bangor University by Professor Phil Molyneux) addresses the question of the 'source' of the 2008 crisis. Was bank sector deregulation a major factor? How important was the bonus culture in explaining the 2008 crisis? What are the regulatory origins of the crisis and the risks faced by the European banking system? 33 academics (including the speakers; doctoral students) registered for this first seminar. Speakers were drawn from the University of Cambridge; the Bank of England; Tilburg University (Netherlands); Vanderbilt University (USA). Attendees came from the National Grid; Sunderland University; Universities of Leicester and Coventry.

Theme II: Empirical modelling; distributional assumptions/efficiency (hosted at St. Andrews University by Professor John Wilson) addressed the difficult topic of how empirical modelling is affected by changes in the distributional assumptions and efficiency considerations after the 2008 crisis event. Efficiency and the shadow price of capital was considered. The relation between size of banks and efficiency was considered. Technical challenges were also actively discussed. As an example there were papers on dynamic market timing and the use of shortage functions in preference modelling. The seminar was attended by some doctoral students. Speakers were drawn from the University of Glasgow; Loughborough University; the University of Edinburgh; CNRS (France) and Boston University (USA).

Theme III: Empirical modelling; distributional assumptions/efficiency (stochastic models) (hosted at the University of Manchester by Professor Sergei Fedotov) addressed probably the most difficult topic of the seminar series: can mathematical finance really deliver upon the very complex demands the financial system is asking from that community? We discussed the situation that if the 2008 crisis were to repeat itself, would bank bail outs or nationalizations be an option? What was the role of real estate in the crisis (when it was considered as an underlying asset in option positions)? Can mathematical finance deliver a 'number' which indicates the risk a bank or hedge fund is facing? Technical issues were also addressed in this seminar, such as how perturbation problems arise in finance. 38 academics (including the speakers; doctoral students) registered for this seminar. Speakers were drawn from the University of Manchester; Imperial College; University of Nottingham and Loughborough University.

Finally, theme IV: Empirical modelling; distributional asumptions/efficiency (non-stochastic models) (hosted at the University of Leicester by Professor Emmanuel Haven and Dr. Meryem Duygun) addressed the potential for new models (for instance non-stochastic models) in finance. Some talks attempted to model the role of information in finance with novel tools (at least for finance). As an example how can Fisher information and potential functions be used in finance? What is wrong with the exponentially discounted utility model? Can a crisis be predicted? Several academics (including some doctoral students) from the University of Leicester (including from departments outside of social science, such as Physics) attended the talks. Speakers were drawn from the Fields Institute (University of Toronto, Canada); University of Arizona (USA); University of Leicester; Università di Palermo (Italy) and Deutsche Bank (Germany).
Exploitation Route We need to wait to see what the impact of the book will be. The book will be ready April 2015 and will be published by Palgrave MacMillan.

At the time of writing this report (March 3 - 2016), the book is now available in published form (published by Palgrave MacMillan). We need to await the impact of the book as the book has been available in published form for only about 1.5 months so far. At the time of writing this additional entry (February 26, 2018), we can see the book is available on a multitude of book websites.
Sectors Financial Services, and Management Consultancy,Government, Democracy and Justice

Description The Handbook, which is the published output of this grant, has been actively used in the classroom. The Handbook was used actively in the second year - financial management - undergraduate module in the University of the principal investigator. This module was attended by more than 200 students and the students used material from this Handbook in their essays. It is very likely we will repeat this again next academic year. I have now moved to a University in Canada. I may in the future make use of the handbook in future modules. This academic year 2018-2019, the handbook has been used in my graduate Economics course (as part of the MBA). We used the book in the section of the course, where we discuss the financial crisis.
First Year Of Impact 2017
Sector Education
Impact Types Societal

Description Engagement with students of the published Handbook 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Undergraduate students
Results and Impact This year (2016) - the principal investigator, used the published handbook, in the second year Undergraduate module - Financial Management. This module is attended by well over 200 students. As part of their essay requirement, students had to use the Handbook. This has worked out quite well and the principal investigator intends to use the Handbook again next year.
Year(s) Of Engagement Activity 2016