Understanding Financial Catastrophe Risk: Developing a Research Agenda
Date: 9 April 2013, followed by dinner in the Senior Combination Room at Christ's College, Cambridge
Location: Cambridge Judge Business School
This was an interdisciplinary forum of thought leaders in the field of understanding financial catastrophe. It included people working on complex systems, economics, finance, historians and others. The workshop was an interactive day of facilitated presentations and discussions. It ended with the group defining two sets of priorities. Firstly for academia in general, the key priorities for a research agenda in improving the understanding of financial catastrophe risk management professionals, policy-makers and other practitioners managing the risk of financial crisis. The second set of recommendations produced by the attendees was for how the Cambridge Centre for Risk Studies could best contribute to this research agenda with their research programme.
Download the agenda (pdf, 171KB)
Download a mind map of themes developed during the Workshop (pdf, 4.25MB) (produced by Dickie Whitaker, Financial Services Knowledge Transfer Network)
Understanding Financial Catastrophe Risk: Developing a Research Agenda
Photos from the event, held at Cambridge Judge Business School on 9 April 2013, are available via Flickr.
Presentations from the Workshop
- Introduction to the Workshop (pdf, 809KB) Dr Andrew Coburn, Centre for Risk Studies
Theme A: Research to Support Policy Issues for Financial Stability
- A Critical View of the Ongoing Crisis (pdf, 2.28MB) Professor Michael Dempster, Cambridge Centre for Financial Research
- Operationalising Macroprudential Policy at the Bank of England (pdf, 629KB) Dr David Aikman, Bank of England
- Catastrophe Insurance Insights on Financial Catastrophes (pdf, 1.5MB) Dr Gordon Woo, RMS
Theme B: Research Contributions to Improving Corporate Risk Management
- Some Thoughts on Today's Modelling Shortfall (pdf, 549KB) John Hibbert, Honorary Professor, Heriot-Watt
- Financial Networks and Cartography (pdf, 1.29MB) Dr Kimmo Soramäki, Financial Network Analysis
- Cambridge Centre for Risk Studies Research Programme on Financial Catastrophe (pdf, 2.48MB) Dr Andrew Coburn, Cambridge Centre for Risk Studies
Research Review Contributors
Dr David Aikman
Senior Manager, Financial Stability, Bank of England
David Aikman is a senior manager in the Financial Stability directorate of the Bank of England. He has overall responsibility for advising the newly formed Financial Policy Committee on issues relating to macroprudential policy tools. His team also leads for the Bank on prudential policy matters in Basel and Europe. David has represented the Bank on various external policy working groups, including in Basel and at the ESRB.
David joined the Bank in 2003. In his previous roles, he headed the Bank's work in developing a model of systemic risk, RAMSI. And prior to that, he worked on macroeconomic forecasting for the MPC and various issues relating to monetary policy strategy.
David has a PhD in macroeconomics from the University of Warwick. He is the author of various academic papers relating to banking and macroeconomics. In 2005, he was visiting scholar at the Institute for Monetary and Economic Studies, Bank of Japan.
Under the Financial Services Act (2012), the Financial Policy Committee (FPC) of the Bank of England has been handed unprecedented powers to take macroprudential actions to protect and enhance the resilience of the UK's financial system. For this regime to be effective, we urgently need more research on the measurement of systemic risks (including indicators) and the transmission mechanism of the FPC's tools to mitigate systemic risks, acknowledging the inevitable uncertainty the decisions of this Committee will need to be made under.
- Measuring systemic risk (including indicators)
- Transmission mechanism of macroprudential tools (both short term and medium-to-long term)
- Trade-off between simplicity and complexity in financial regulation
Dr Nitin Bakshi
Assistant Professor, Management Science & Operations, London Business School
Dr Nitin Bakshi has been at London Business School since 2008. He received his PhD in Operations Management from the Wharton School, University of Pennsylvania in 2008, his MS in Management Science and Engineering from Stanford University in 2002, and his BTech in Electrical Engineering from the Indian Institute of Technology, Bombay, in 1998.
Head of Macro Research, Iveagh Investment Fund
William has over 13 years' investment experience in institutional investment management and wealth management. As a Quantitative Analyst at Morgan Stanley Investment Management he developed portfolio analytics and asset allocation models for wealth management, managing a team of four analysts. At Barclays Capital he was a Senior Investment Strategist in a team managing $2.5bn in multi asset and quantitative strategies, and UCITS funds. At Iveagh William is Portfolio Manager and Head of Macro Research responsible for the firm's proprietary macro models and outlook, quantitative analysis and investment signals, as well as contributing to tactical and strategic asset allocation. Capital preservation, volatility targeting, downside protection, macro risk assessment, and tail risk management are highly relevant to Iveagh's investment process. William holds an MSc in Finance from London Business School, and MAs in Philosophy from both the University of Cambridge and the University of Southern California, receiving the Dean's Fellowship for Academic Excellence from the latter.
- Monitoring the source and level of financial risk (indicators, metrics).
- The market impact of a financial catastrophe, e.g. asset valuations, liquidity, bid ask spreads, portfolio performance in short and longer term.
- Macroeconomic scenarios post financial catastrophe.
Dr Gary Bowman
Research Associate, Centre for Risk Studies, University of Cambridge
Gary Bowman is a Post-Doctoral Research Associate in the Centre for Risk Studies. His research spans the risk and strategy domains, focusing particularly on scenario planning, systemic risk, and the impact of financial regulation of the structures, practices and processes of risk management. Gary has held academic positions at the University of St Andrews and Strathclyde Business School, and has consulted on scenario-based strategic planning throughout the public and private sectors.
To enhance current understanding of systemic risk and the dynamics involved with financial turmoil, specifically identifying the causal forces (and loops) in failure and the directionality of crises.
- Techniques for identifying and valuing systemic risk
- Clarification of too-big-to-fail thresholds
- Ways to manage systemic risk without over-regulation
Corporate Risk Manager, Treasury, BP
Philip Brice is the Corporate Risk Manager within BP Treasury. His responsibilities include the management of FX risks across the group, and forecasting the impact that market volatility and other events could have on the cashflows of the business. He was previously Manager of Equity Capital Markets. Prior to that he spent over 20 years in engineering, R&D and management across all segments of the company. He holds an MSc in Finance from London Business School and an MEng in Chemical Engineering from Cambridge University and is a certified ERP. Recent work includes coping with financial catastrophe risk, and looking at usefully-simple models of financial risk from non-financial factors and from market risks.
The standard tool for analysing the impact of financial catastrophes is the stress test. But there are two major issues: reasonable scenarios and models that work in extreme conditions. Deciding on realistic scenarios for stress testing is a major challenge - too believable, and worse scenarios will occur; too unbelievable, and you only discover that, were the world to end, your company or institution would probably fail as well. And as the system that you want to analyse increases (from asset to segment to company to country to planet), so the difficulty increases of producing a rational and internally consistent set of stress scenarios that nevertheless covers the range of factors that can have a serious impact. The input scenario then needs to be modelled. More attention needs to be put into models that perform adequately for the situations in which they are needed - in extreme, tail-event, worlds. And the stakeholders in an institution need to determine an acceptable probability of failure, and what the implications of that are going to be.
- Methods for building models that work adequately in extreme situations
- Methods for developing consistent and useful extreme scenarios
- Ways of displaying the results that will help senior stakeholders to decide what risk of failure is acceptable
Dr Christian Brownlees
Assistant Professor, Department of Economics and Business, Universitat Pompeu Fabra
Christian Brownlees is an Assistant Professor in the Department of Economics and Business at the Universitat Pompeu Fabra in Barcelona. He received his (BS) degree in Economics and Quantitative Methods in 2003 and PhD degree in Statistics in 2007 from Università di Firenze, and was a Post-Doc Research Fellow at NYU Stern until 2011. Over the years he studied, visited and researched at the University of Reading, Monash University and UCSD.
Christian has been researching nonlinear time series models for the analysis of the financial markets, with a special focus on volatility. While a post-doc at NYU, he developed the vlab, a web-based app for measuring and predicting time varying volatility and correlations in the financial markets. He has also been working in the field of systemic risk and has proposed systemic risk indices that measure the potential capital shortage that large financial institutions are expected to experience in case of a systemic crisis. Over the last year, he has started working on network techniques geared towards the analysis of financial networks with Matteo Barigozzi (LSE) and Kimmo Soramaki (FNA).
Many different studies on the crisis suggested (ex-post) that several "early warning signals" of the 2007/2009 crisis were available. One of the main opens issues in my view is that ex-ante, monitoring and synthesising the information contained in vast multivariate systems is challenging. I believe that the development of efficient methods that summarise the statistical behaviour of large multivariate systems is important to construct predictions on the behaviour of large economic systems in case of extreme events. A related issue is the development of tools able to validate the predictions based on such procedures. It is useful to be able assess predictions about extreme events, before the extreme events are realised.
- Development of methodologies for the analysis of vast multivariate systems
- Development of scientifically robust tools for the evaluation of the predictions provided by extreme risk models
- Establishing what are the main empirical regularities of large catastrophes in order to understand what are the common traits of disasters
Dr Fabio Caccioli
Postdoctoral Fellow, Santa Fe Institute and Institute for New Economic Thinking, Oxford Martin School, University of Oxford
Fabio Caccioli is a postdoctoral fellow at the Santa Fe Institute in Santa Fe, New Mexico (USA). He holds a PhD in Statistical Physics from the International School for Advanced Studies in Trieste (Italy). His research mainly focuses on systemic risk and financial stability. Other research interests include complex networks and non-equilibrium statistical mechanics. His contribution to the study of systemic risk includes the study of financial contagion due to overlapping portfolios and the study of the impact of derivatives for financial stability.
There currently exist good models relating to the mechanisms underlying systemic risk (e.g. counterparty loss, roll-over risk, common asset holding). More work needs to be done to:
- improve the realism of the existing models, for instance including more realistic behavioural rules
- understand the interaction between different sources of systemic risk
- calibrate the models with real data
On a different level, research should be done in order to transfer what we have learned about systemic risk into better tools for risk assessment at the individual level.
Finally, we should also aim to focus on interactions between the financial system and the rest of the economy.
- Understanding how crisis are endogenously generated within the financial system (e.g. through leverage and correlations between financial institutions)
- Understanding the interaction between the financial system and the real economy
- Understanding how to make the financial system more stable without having a negative impact on the economy
Dr Andrew Coburn
Director of External Advisory Board, Centre for Risk Studies, University of Cambridge
Andrew Coburn is the principal investigator on the research track of understanding financial catastrophe at the Cambridge Centre for Risk Studies, and the convenor of the workshop. Andrew is one of the leading contributors to the creation of the class of catastrophe models that over the past 20 years has come to be an accepted part both of business management in financial services and of public policy making for societal risk. He has extensive experience in developing models and using them for business decision support. Dr Andrew Coburn is a member of the senior management of Risk Management Solutions, the leading provider of catastrophe risk models to the insurance industry.
The causal mechanisms are not yet well understood for how the financial system switches from being well-behaved, and able to be managed and modelled with reasonable accuracy, to catastrophic collapse, where different explanations and models are needed. The process of propagation of a shock through the financial system needs to understand the connectivity within the system - good data on this is not easily available - and how behaviour of individuals and institutions causes contagion to propagate through the system. For application to risk management of future financial catastrophes, all causes need to be considered, not just the most recent causes of the 2008 crisis.
- Understanding the mechanisms by which the financial system switches from normal behaviour to a catastrophic collapse
- Developing coherence and realistic behaviour in the structural modelling of scenarios of potential shocks to the financial system
- Developing a comprehensive taxonomy of potential causes of future financial catastrophes
Dr D'Maris Coffman
Director of Centre for Financial History, University of Cambridge
Professor Michael Dempster
Professor Emeritus, Centre for Financial Research, Statistical Laboratory, Department of Pure Mathematics & Statistics, University of Cambridge
Managing Director, Cambridge Systems Associates
Educated at Toronto, Carnegie Mellon and Oxford, Michael Dempster has taught and researched in top universities, including Oxford, Cambridge, Stanford, California-Berkeley, Princeton, Toronto, Melbourne and Rome. He is founding Editor-in-Chief of Quantitative Finance, has served on the editorial boards of many major journals in mathematics, economics and finance, and is founding Editor-in-Chief of the Oxford Handbooks in Finance and Co-Editor of the Chapman & Hall /CRC Mathematical Finance Series. He has been consultant to a number of global financial institutions and several governments and is regularly involved in executive education in financial engineering and risk management around the world. Author of over 110 published research articles in leading international journals and 12 books, his latest is The Euro in Danger (with J.S. Chadha and D.S. Pickford). His work has won several awards and he is an Honorary Fellow of the UK Institute of Actuaries and Managing Director of Cambridge Systems Associates Limited, a financial analytics consultancy and software company.
Quantitative research in both finance and economics needs to take a longer term global perspective. For example, global dynamic models of the capital markets, interbank flows and the macro economy are needed to inform current crisis policy. These must include realistic behavioural, institutional and political constraints and account for future risks to mankind.
- Analysis of the macroeconomic background and development of the ongoing crisis
- Analysis of and solutions to global environmental risk
- Analysis of and solutions to global demographic risk
Professor John Eatwell
Professor of Financial Policy, Cambridge Judge Business School, University of Cambridge and President of Queens' College, Cambridge
Professor Eatwell is a Board Member of the Securities and Futures Authority, the FSA Regulatory Decisions Committee and the Jersey Financial Services Commission. In all these posts systemic risk has been and is his major concern. He has written extensively on systemic risk, and developed the "earthquake analogy" both with respect to the prediction of catastrophies, and the cost of managing them.
The relationship between risk and function: what do we want financial services to do, how can we manage the risks inherent in them doing it?
- Risk and functionality of financial services
- Risk and regulatory arbitrage
- Systemic risk and macro-economic management
Professor Doyne Farmer
Professor of Mathematics and Co-Director, Complexity Economics, Institute for New Economic Thinking, Oxford Martin School, University of Oxford
Professor J. Doyne Farmer co-directs the programme on complexity economics, which is part of the INET@Oxford research institute. He has broad interests in complex systems, and has done research in dynamical systems theory, time series analysis and theoretical biology. His main interest is in developing quantitative theories for social evolution, in particular for financial markets (which provide an accurate record of decision making in a complex environment) and the evolution of technologies (whose performance through time provides a quantitative record of one component of progress). Farmer arrived in Autumn 2012 from the Santa Fe Institute.
Understanding how the collective dynamic of the banking system amplifies external shocks, and how the financial system performance connects to the entire economy. Understanding the role of leverage in systemic risk and financial performance, and the compromise between performance and risk.
- Understanding the effects of leverage on systemic risk
- Understanding the effects of overlapping portfolios from institutions holding similar asset types in common, in increasing systemic contagion
- Understanding the channels of contagion and modes of failure, including counterparty failure and liquidity contraction
Chief Risk Officer, HSBC Bank plc
Bruce has held a variety of line and staff positions in commercial and retail banking over a nearly 30 year career. He has specialised in Risk Management, and currently is Chief Risk Officer, Europe, for HSBC, responsible for managing risk across a diversified set of businesses which operate in 19 countries. He previously served as the Chief Risk Officer for the commercial banking, retail and insurance operations in the UK, and helped the bank to navigate the credit crisis. Before coming to Europe in 2008 he served as Chief Retail Credit Officer in North America for HSBC, where he built a risk control function and helped the firm navigate the sub prime issues in the Finance Company.
His career includes 17 years at Citibank; in his final role he was Managing Director and Senior Credit Officer in their Global Consumer Credit and Fraud Risk Management Office. Over a five-year period he oversaw a range of international businesses and product lines, and helped to integrate a number of acquisitions.
Dr Andrew Freeman
Fellow of Centre for Risk Studies, University of Cambridge
Dr Co-Pierre Georg
Research Economist, Research Center, Deutsche Bundesbank
Co-Pierre Georg is a Research Economist at the Research Center of Deutsche Bundesbank and a Collaborating Research Scholar within the networks cluster of Keble College at Oxford University. His PhD was on "Systemic Risk in Interbank Markets" at the Friedrich-Schiller-Universitšt Jena within the Graduate School Foundations of Global Financial Markets - Stability and Change in September 2011 and he worked as a postdoctoral researcher at the Interdisciplinary Group of Complex Systems Research at the University Carlos III Madrid until June 2012. Co-Pierre has published widely on systemic risk and banking networks. He is the author of Black Rhino, an open source, financial network multi-agent simulation model. From June 2013, Co-Pierre will be a Lecturer at the University of Cape Town Graduate School of Business.
The recent financial crisis unveiled a fundamental change in the financial system over the past decade: heterogeneous and interconnected agents interacting in a complex web of various interconnections challenge some of the fundamental assumptions in economics and finance. With modern computing power economics is offered an opportunity to broaden the scope and applicability of existing models to new frontiers. My research focuses on the boundary between traditional economics of representative and rational agents and the novel tools originating from other disciplines. My main work is on the micro foundations of financial multi-agent simulations and the notion of equilibrium in these models.
- Develop a model of representative banking behaviour capturing risk, return, maturity, and liquidity management. Combine a large number of heterogeneous agents in a computational model and replicate the representative agent limit
- Generalise a DSGE model to account for heterogeneous agents
- Model the multilayer network structure implied by banks interacting via various different types of financial instruments
Professor Paul Glasserman
Jack R. Anderson Professor of Business, Columbia Business School, Columbia University
Paul's research focuses on risk management, derivative securities, and portfolio selection. During 2011-2012, he was on leave from Columbia and working at the Office of Financial Research in the US Treasury department. He has also held visiting positions at the Federal Reserve Bank of New York, NYU, and Princeton. He has taught at Columbia since 1991.
- Foundations of stress testing
- Systemic effects of counterparty risk
- Market mechanisms, such as contingent capital, to address "too big to fail"
Independent Consultant & Honorary Professor, Heriot Watt University
John Hibbert is an experienced financial risk manager with more than 30 years of experience accumulated in roles in investment banking, asset management, insurance and research/consulting. In 1995 he co-founded Barrie & Hibbert, which went on to become a highly successful advisory/software business and was sold to Moody's Corporation in 2011. He now works as an independent financial consultant in addition to pursuing projects in the charity sector.
- Dependence during financial market stress and the role of stochastic risk and liquidity premia in amplifying market movements
- Flight-to-X effects under stress
- Understanding the linkage between credit/leverage (corporate and consumer) and system vulnerability
Professor Giulia Iori
Professor of Economics, Department of Economics, City University, London
Giulia Iori obtained her PhD in Physics from University of Rome in 1993. Between 1993 and 1998, she conducted research in theoretical Physics at several Universities and institutes in Europe and the United States.
From 1998 to 2000, she was a Lecturer in Finance at the University of Essex and from 2002 to 2004, first Lecturer in financial mathematics and then Reader in Applied mathematics at King's College London. She is currently professor of Economics at City University, London. She has taught courses in Financial Engineering, Corporate Finance, Investment, Financial Mathematics and Exotic Options. She has been a visiting scholar at several Universities and research centres including the Santa Fe Institute, the International Center for Theoretical Physics (Trieste, Italy), the European Central Bank and the University of Technology Sydney.
Her research work has covered different areas in physics, applied mathematics, biology, finance and economics.
She contributed to the development of an approach to complexity in financial markets and economic networks derived from the tools of statistical mechanics and non-linear dynamics. Other contributions are in financial time series analysis and its implications to option pricing and hedging.
Current research interests include: market microstructure, credit risk and systemic risk, operational risk, complexity in economic networks, high-frequency financial time series analysis.
Her research has been funded by the European Commission (Projects FOC and CRISIS) the EPSRC (Fast Stream Grant: 'Complexity in Economic Networks), plus a number of small grants from national and international awarding bodies. She was awarded the Lamfalussy Fellowship from the European Central Bank in 2003.
Giulia was the UK representative to the management Committee of the COST Action P10 "Physics of Risk" and of the COST Action Physics of Competition and Conflicts.
Giulia is the author of several peer-reviewed papers on leading journals in Finance and Physics, including Journal of Economic Behavior and Organization, Journal of Economic Dynamics and Control, European Journal of Finance, Quantitative Finance and Physical Review Letters, for which she also acts regularly as a referee. Since 2005 Giulia is an associate editor for Journal of Economic Behaviour and Organization and since 2013 of Journal of Ecomic Dynamics and Control.
She regularly presents her research work at international conferences often as invited speaker.
Giulia is a Member of the Physics in Finance group at the Institute of Physics, of the London Mathematical Society and of the Bachelier Finance Society. She has served as expert grant evaluator for the British Council, the Engineering and Physical Science Research Council and the European Commission.
- Identify appropriate measures for quantifying and mitigating systemic risk
- Identify early warning indicators of systemic risk
- Identify ways to strengthen the resilience of the banking sector
- Data issues: collection, integration, data quality, managing large volumes of data
- Understanding the channels of propagation between financial sector and the macroeconomy; identifying measures to encourage good deleveraging
- Understanding the dynamics of trust and trust and trust evaporation
- Understanding the role of rating agencies
- Understanding the role of heterogeneity in banking systems
- Understading the role of trading in OTC markets and dark pool
- Understanding the role of high frequency trading
Dr William Janeway
Senior Advisor at Warburg Pincus and member of the board of managers of the Cambridge Endowment for Research in Finance
William H. Janeway has lived a double life of "theorist-practitioner", according to the legendary economist Hyman Minsky who first applied that term to him 25 years ago. In his role as "practitioner", Bill Janeway has been an active venture capital investor for more than 40 years. During that time he built and led the Warburg Pincus Technology Investment team that provided financial backing to a series of companies making critical contributions to the internet economy, including BEA Systems, Veritas Software and, more recently, Nuance Communications, the speech recognition company. He remains actively engaged as a Senior Advisor and Managing Director at Warburg Pincus. As a "theorist", Janeway received a PhD in Economics from Cambridge University where he was a Marshall Scholar. His doctoral study on the formulation of economic policy following the Great Crash of 1929 was supervised by Keynes' leading student, Richard Kahn (author of the foundational paper on "the multiplier".) Janeway went on to found the Cambridge Endowment for Research in Finance. Currently he serves as a Teaching Visitor at the Princeton University Economics Department and Visiting Scholar in the Economics Faculty of Cambridge University.
Understanding the two-way feedback between the financial system: both how financial shocks effect economic performance and how economic performance - shortfalls of cash flow in the real economy - impacts the financial system. Bridging the gap between Finance, as practiced in the business schools, and Economics, in the Economics Departments. In particular, this means going beyond the addition of "financial frictions" to Dynamic Stochastic General Equilibrium models. It is critically important to integrate money, credit and finance with economic decision-making from the "micro-foundations", in order to explore the consequences through the sectoral ("meso") levels to the macroeconomy as an aggregated whole. The necessary complexity suggests the value of deploying agent-based models, subject to appropriate restrictions on degrees of freedom.
- Understanding the critical phenomenon of 'Too-Big-To-Fail/Too-Big-to-Bail/Too-Big-To-Jail
- Understanding the consequences for the long term health of the financial system of pursuing severe austerity measures
- Understanding the positive feedback mechanisms in banking that are contrary to economic principles of non-financial assets, such as increased pricing creating excess capacity that triggers increased production
Professor Frank Kelly
Professor of the Mathematics of Systems, Statistical Laboratory, University of Cambridge, and Master of Christ's College, Cambridge
Frank Kelly is Professor of the Mathematics of Systems in the University of Cambridge, and Master of Christ's College. He was elected a Fellow of the Royal Society in 1989, and a Foreign Associate of the National Academy of Engineering in 2012. His main research interests are in random processes, networks and optimisation. He is especially interested in applications to the design and control of networks and to the understanding of self-regulation in large-scale systems.
The analogies between systemic risk in technologically constructed networks (communication, transport, energy) and financial networks.
MSc Student, Mathematics and Finance, Imperial College, London
Michael Kusnetsov is currently undertaking an MSc in Mathematics and Finance. His Masters thesis on regulatory control of financial instability is to be written in collaboration with RMS and input from the Bank of England. From 2008 to 2012 he trained and then qualified as a solicitor at Farrer & Co into the Banking & Financial Services Team, focusing on regulated fund structuring (launches, merges and terminations), LIBOR-linked mortgages and general regulatory advice. From 2006 to 2008 Michael obtained a Graduate Diploma in Law and completed a Legal Practice Course at BPP Law School. From 2001 to 2005 he obtained MMath in Mathematics at the University of Warwick.
Dr Philippa Malmgren
President, Principalis Asset Management
Dr Philippa Malmgren is the President and Founder of Principalis Asset Management, based in London. Principalis engages in original research regarding risks to the market that are not easily quantified, namely politics, policy and geopolitics. Based on these insights, Principalis recommends specific investment strategies, trades and deals. Through Principalis, Pippa has served as an advisor to some of the world's leading asset managers including, traditional fund managers, hedge funds, Sovereign Wealth Funds, Pension Plans, Corporations, Banks and Family Offices. Additionally, She served as the financial market advisor in the White House and on the National Economic Council from 2001-2002. She was previously the Deputy Head of Global Strategy at UBS and the Chief Currency Strategist for Bankers Trust. She also headed the Global Investment Management business for Bankers Trust in Asia.
Inflation: mapping inflation as a driver of social unrest, especially in emerging markets.
Multiple governments around the world are doing their utmost to create inflation as a means of defaulting upon or managing their debt. If we assume for a moment that it will succeed, then what are the implications for risk?
Food, energy, raw materials and other hard asset prices all become bid when investors begin to fear that paper financial money is being devalued by money printing or devaluation. This has led to a bid on food, energy, raw materials and other hard assets that are essential to human life. Emerging market workers spend 40%-70% of their income on food and energy alone. So, emerging market inflation has already become forceful enough to contribute to riots from Bangladesh to China to the Middle East where food inflation played a serious role in catalysing the Arab Spring. This is causing an old-fashioned wage price spiral in emerging markets from Argentina to Brazil to South Africa to Asia where workers are trying to keep up with price pressures by demanding higher pay. But, this is also rendering many emerging markets less competitive and causing manufacturing, for example, to move back to the North America and Eastern Europe where costs are lower and social stability is greater.
The loss of jobs, competitiveness and faith in the future forces governments to become more aggressive in their efforts to provide food and energy at the right price. As a result we see commodities becoming a source of conflict both within and among affected states. Also, the loss of faith in the government's ability to provide a better future ("make me rich before I get old") entices opposition elements to challenge governments thus raising the risk of juntas, coups, assassinations, terrorist attacks, separatist movements and challenges to the current leadership.
Dr Serafin Martinez Jaramillo
Financial Stability Directorate, Central Bank of Mexico
From October 2006, Serafin has worked as a senior financial researcher at the Mexican Central Bank. He has represented the Mexican Central Bank at conferences and seminars organized by the International Monetary Fund (IMF), the Bank of England, the Bank of Canada, the Deutsche Bundesbank and many more. He also represented the Mexican Central Bank in working groups of the Financial Stability Board (FSB) and the Bank for International Settlements (BIS). Serafin is the referee of international journals and conferences such as Journal of Economic Dynamics and Control, IEEE Transactions on Evolutionary Computation, etc. He is a member of the Mexican National Researchers System level I, and a visiting fellow at the University of Essex.
The most important areas of research from a central bank point of view are the consolidation of research on systemic risk, the modelling of endogenous risk processes and finally, tail risk and system wide stress testing.
- Consolidation of research on systemic risk
- Endogenous risk processes
- Tails risk and system wide stress testing
Dr Elena Medova
Visiting Fellow, Statistical Laboratory, University of Cambridge
Managing Director, Cambridge Systems Associates
Dr Medova's research includes stochastic optimisation techniques and their application for long-term asset allocation and asset liability management; risk management, particularly operational, credit risk and market risk integration, and economic and regulatory capital allocation in commercial banks. Her work on operational risks was a pioneering academic study employing statistical techniques appropriate for extreme or catastrophic events with consequences leading to bank defaults.
Research on joint management of assets and liabilities supported by integrated IT infrastructure of the financial institution.
- Further developments of advanced quantitative techniques beyond the commonly used hypotheses of normality, market efficiency, etc.
- Focus on the long-term objectives of financial institutions
- Transparency of the organisational structure of commercial banks
Managing Director, RMS
Peter runs RMS's Capital Markets and LifeRisks groups. RMS Capital Markets provides products and services for the transfer of catastrophe risk to the capital markets. He has led the evolution of this group from providing modelling for catastrophe bond issuances, to providing a portfolio management software platform for insurance-linked securities. RMS LifeRisks provides a state-of-the-art modelling platform for analysing excess mortality and longevity risk, as well as transferring these risks to the capital markets.
Peter's background has focused on how to bring risk quantification, technology, and management science together to help financial institutions make better risk-return decisions. Before joining RMS, Peter was a co-founder of ERisk, a firm that provided risk and capital management software and consulting to the banking industry. Before that, he was a partner in Oliver, Wyman's risk management practice, where he spearheaded the firm's expansion into risk and capital management consulting for the Property & Casualty insurance sector.
Peter began his risk management career as a portfolio manager with Prudential Insurance Company, where he was part of the early wave of engineers moving into quantitative finance. Peter has a BA in Engineering Sciences from Harvard College, an MS in Engineering Management from Stanford University, and is a CFA charterholder.
I believe that most of the financial crises in the past few decades have been the result the unwinding of 'leveraged crowded trades'. When many large leveraged investors hold the same position, the system is susceptible to a positive feedback loop where the value of the position declines, causing margin calls, forcing more sales and further decline in the asset prices. To model this we need:
- Network model of who owns what and who owes what to whom
- Nonlinear (positive) feedback model of what happens when you perturb this system
- Creation of an 'event model' that can be used to define the risk in the system, given the network configuration
- Ways of linking all of this to implied volatilities in the option markets
- Network model of leveraged crowded trades
- Model of the positive feedback of the system
- Event model illustrating the risk
Affiliated Researcher, Centre for Financial History, University of Cambridge
Duncan Needham is an economic historian at the University of Cambridge and a Research Affiliate at the Centre for Financial History at Newnham College. After completing his first degree at the London School of Economics, and a Masters at Cass Business School in Shipping, Trade and Finance, Duncan worked at Credit Suisse Financial Products and JP Morgan, where he ran the banks and financials desk, trading bonds and credit default swaps. He then spent four years running Cairn Capital's Investment Grade Collateralised Debt Obligation business, before returning to academia in 2008 to complete his MPhil in Economic History. He will shortly complete a PhD at the University of Cambridge on UK monetary policy from the 1960s to the 1980s.
Two types of model lie at the heart of the recent credit crisis: Collateralised Debt Obligation pricing models and rating agency models. These models relied on complex mathematical processes that were only fully understood by a minority of the financial market operators who used them to price and rate the structured products they bought and sold. When the credit crisis broke in 2007, a huge divergence opened up between what the model said a particular product was worth and what the market would pay for it. In the bull market, modellers had sought increasing complexity to generate additional yield. In the bear market, complexity meant illiquidity and capital losses.
I'd like to explore the notions of complexity and liquidity as contributors to historical financial crises. There is also a regulatory angle. The Basel accords encouraged the 'outsourcing of regulation' to private sector rating agencies which relied on their own models to assign ratings to increasingly complex financial products. Over-reliance on complex ratings models combined with over-reliance on complex pricing models to produce financial products that could not survive the end of the bull market in credit. The resulting capital losses have magnified the crisis.
- The history of financial and liquidity crises
- The history of financial regulation
- The uses and abuses of complex financial models
Dr Louise Pryor
Actuary and Risk Specialist, Centre for Risk Studies, University of Cambridge
Louise Pryor's career has covered software, financial modelling, academia and financial regulation in a variety of roles. She has worked in the insurance industry as an actuary and software risk consultant, specialising in risk management, modelling and systems and controls. More recently she was Director, Actuarial Standards at the Financial Reporting Council, where she led the development of technical Actuarial Standards and was a member of the Board for Actuarial Standards. She is also an experienced software developer and development manager, and has a PhD in Computer Science.
The common theme is risk and uncertainty. She has been involved in the management of risk at all levels: operationally, in project management; conceptually, reasoning about and modelling risks in workflow management and financial services; and strategically, considering the pros and cons of policy initiatives.
- What constitutes a financial catastrophe?
- The mechanisms of financial catastrophes and how the effects are propagated
- What the effects of financial catastrophes are on the overall economy and business environment and how to measure them
- How external factors and shocks interact with financial factors
Professor Daniel Ralph
Director of the Centre for Risk Studies, University of Cambridge Judge Business School
Danny Ralph is Professor of Operations Research and a founder and Academic Director of the Centre for Risk Studies at the University of Cambridge Judge Business School. He is also a Fellow and Director of Studies at Churchill College. Prior to joining Cambridge for a dual appointment in the Engineering Department and the Business School, Danny held academic positions at Cornell University and the University of Melbourne. His research interests include risk in business decision making and investment under risk for energy companies, underpinned by optimisation methods and theory. He is joint Editor-in-Chief of the journal Mathematical Programming.
Systemic risk, e.g. the relationship between micro prudential policy and stability of the banking system, needs further study. Standard ideas - like the Tobin tax or the analog of "fire breaks" between banks or increasing the percentage of reserves - need to be understood in terms of the tradeoff between decreasing systemic risk and decreasing economic output, and over what time period. The other main areas relate to how firms respond to regulation or lack of it. What risk framework should a firm adopt to inform its strategy, which requires an understanding of Knightian uncertainty? And how would this framework be implemented or practiced at different levels of the firm?
- Understand mechanisms for decreasing systemic risk and how these affect economic output over time
- What risk framework should a firm adopt to inform its strategy bearing in mind that mid- and long-term scenarios may not fit into a probabilistic scheme
- How to link management practice with an integrated risk framework within a firm
Director of Technology Research, Centre for Risk Studies, University of Cambridge
Simon is the technical systems architect for the 'System Shock' project at the Centre for Risk Studies, developing the research platform for network modelling for financial catastrophe. This includes the data architecture and enabling the modelling analytics for contagion and liquidity propagation, and shock scenario applications. Simon has worked most of his career in computational techniques for natural hazard risk assessment with a main focus in the insurance industry. He has worked on risk pricing for primary insurers, catastrophe modelling for reinsurers, and risk bonds in the capital markets. When not in the Risk Centre, Simon has a role as a lead technologist in the GEM Global Earthquake Model project. He originally trained as an architect at Cambridge University.
The technical systems challenge for understanding financial catastrophe is blending different categories of models, such as financial network representations, with macro-economic models and real-world scenarios. Developing a data standard for capturing the information that adequately represents the interconnectivity of the financial system is a key challenge.
- Data exchange standards
- Visualisation of risk
- Modern computational techniques
Head of Portfolio Allocation, Catlin Group
Nylesh Shah has worked as an actuary in the fields of life insurance, pensions and general insurance and has had a particular interest in the construction of financial models that are used as an input into management decision making. Over the last six years he has been primarily focussed on the management of investments which are held to support general insurance policies which cover a range of primarily short term liabilities including natural catastrophe risk.
The nature of catastrophes is that each one tends to be different to what has been seen before and there is a tendency to use over parameterised models which explain the past but may not be robust for the future. Does the use of models provide a false sense of comfort and thereby increase the "risk" in the system?
- Description of most important signals and early warning signs
- Definition of standardised "realistic disaster scenarios" for businesses to use to assess their resilience
- Ways of presenting risk information that is meaningful for decision-making
Global Head of Risk Strategy and Chief of Staff, Global Risk, HSBC Holdings plc
Alan N. Smith is Global Head of Risk Strategy and Chief of Staff of HSBC's Global Risk function, where he is responsible for Risk Appetite, Stress Testing, Risk Governance and Model Oversight. Mr Smith is a member of the Global Risk Management Board and Group ALM Committee, and chairs HSBC's Global Stress Testing, and Model Risk Oversight Committees. Mr Smith has been with HSBC for 18 years in a variety of senior finance, risk and capital management roles. He worked with KPMG London from 1987 to 1994, latterly within its Financial Sector Advisory practice. Mr Smith is a Fellow of the Institute of Chartered Accountants of England and Wales. He earned his undergraduate degree in accounting from the University of the West Indies in Jamaica and an MBA in finance from the Cass Business School in London, which he attended as a UK Commonwealth Scholar.
Dr Kimmo Soramäki
Founder and CEO, Financial Network Analytics
Kimmo is the Founder and CEO of Financial Network Analytics (FNA). Before founding FNA in 2010, he worked for 15 years in policy-making, advisory and multidisciplinary research at several central banks - including the European Central Bank and the Federal Reserve Bank of New York. His research has focused on the interconnectedness of financial systems and on systemic risk. He has published in academic journals in the areas of economics, statistical mechanics and operations research and is a frequent speaker at industry and academic conferences. Kimmo holds a Doctor of Science in Technology and a Master of Science in Economics.
The financial system is changing very rapidly and while the underlying reasons for financial crisis may be similar, they manifest in very different ways. For example, only very recently are the events of 2008 becoming clear and the causes and actions of policy makers intelligently debatable with sufficient information. Research must therefore be underpinned on a relevant and up to date empirical view of the functioning and structure of the financial system, i.e. we must first be able to accurately measure, describe it and understand how entities within the system are interconnected. In a second step we need to develop models that allow the forecasting of system parameters and evaluating alternative policy choices. These models must take into account the dynamic, interconnected and non-linear nature of financial systems. Fruitful inspiration for these models are likely to be found in addition to economics and finance also from complex systems and catastrophe modelling literatures.
- Measuring and mapping interconnectedness (network structure), modelling contagion (network process) and understanding their interplay
- Developing early warning indicators and visual analytics systems for continuous monitoring of the financial system
- Taking into account the 'social psychology' aspect of the financial system
Dr Iman van Lelyveld
Iman van Lelyveld, Deputy Head of the BIS data hub, Supervisory Policy Division, De Nederlandsche Bank
Iman van Lelyveld studied macroeconomics at the University of Amsterdam. After a year as foreign exchange trader at Deutsche Bank de Bary, he started at Radboud University working on a PhD project 'Inflation, Institutions, and Preferences', which was completed in 1999. At De Nederlandsche Bank (Directorate of Supervision) he has covered subjects such as interest rate risk in the banking book, economic capital (primarily for financial conglomerates) and the Basle Accord (in particular the Supervisory Review). He has published widely, is a member of the BCBS Research Task Force and has chaired international research groups on stress testing and liquidity. He has held a part-time Associate Professorship at Radboud University and has been an advisor to the Bank of England and Norges Bank. His research interests include empirical network models, see links to published papers.
Director, Financial Services Knowledge Transfer Network
Dickie Whitaker is Director of the Financial Services Knowledge Transfer Network and the Lighthill Risk Network. He has held board positions in analytical, broking and consulting services in London and New York with Guy Carpenter. He left in 2010 to focus on activities with both the Lighthill Risk Network and Financial Services KTN. In 2011 Dickie was one of the founders and Director of Oasis Loss Modelling Framework, a not for profit catastrophe modelling platform.
Key areas of need include how to represent uncertainty in both hazard and vulnerability assessment. In addition how to visualise uncertainty and how cognitive biases play a role in decision making.
- A framework to define model robustness
- Improved methods of uncertainty quantification
- Improved methods to explain and visualise uncertainty
Dr Gordon Woo
Dr Gordon Woo is an expert consultant on catastrophes, both natural and man-made. Since 2000, he has been a catastrophist with RMS. In January 2011, he was appointed an adjunct professor at the Institute of Catastrophe Risk Management of Nanyang Technological University, Singapore.
He is a noted expert in many fields of disaster management. In 2004, he was named by Treasury and Risk magazine as one of the hundred most influential people in finance. In March 2013, he was a keynote speaker at the annual convention of the Global Association of Risk Professionals, which focused on the mitigation of financial catastrophe risk.
He is the author of the two books, 'The Mathematics of Natural Catastrophes', published by Imperial College Press in 1999, and 'Calculating Catastrophe', published also by Imperial College Press in 2011. The latter has been translated and published in Italian in 2013 as 'Scienza e coscienza delle catastrofi'. These books establish his broad expertise in catastrophic risks of all kinds.
He graduated as the best mathematician of his year at Cambridge University, completed his PhD in theoretical physics at MIT, and was a member of the Harvard Society of Fellows.
A comprehensive study of systemic risk analytics is important for understanding financial catastrophe risk.
As an indicator of potential progress, a major survey of systemic risk analytics (2012) was undertaken at MIT on behalf of the US Treasury Office of Financial Research.
Transatlantic coordination of research effort is desirable. Given the various initiatives instigated by financial regulators to stem financial instability, the regulatory control of financial instability is a key avenue for future research.
- Clear top-down overview of systemic risk
- Development of quantitative tools for analysing future systemic risk, under evolving regulatory controls
- Coordination of research with international finance organisations