The main role of the centre is to carry out research that fills the gap between academia and current problems faced by the industry, whether in conducting comparative studies on pricing and risk management methodologies, or designing improved financial products that can serve the wider community better, or simply being the first stop for policymakers, hedge funds or finance houses where they could commission quantitative studies on topics they do not have expertise on.

The frequent recurrence of financial crises in the last 40 years highlighted the rift between academic research and the current problems preoccupying the financial industry. The product innovation is led by the latter and academic research is lagging in topicality. At the same time, academic research has a lot to offer in terms of general technical methods that could be applied to solve new problems relevant to the financial markets. As an example, before the occurrence of the subprime financial crisis of 2007 very little research was published on securitization models and processes in top financial journals. This lack of realism was a latent contributor to the crisis.

The main role of the centre is to carry out research that fills the gap between academia and current problems faced by the industry, whether in conducting comparative studies on pricing and risk management methodologies, or designing improved financial products that can serve the wider community better, or simply being the first stop for policymakers, hedge funds or finance houses where they could commission quantitative studies on topics they do not have expertise on.

In addition to the normal academic function to publish top quality papers, the centre aims to provide top of the range training functions for financial markets.

The directions of research covered are

1. Stability of Financial Markets
2. Financial Solutions for a Better Society
3. Alternative Asset Classes
4. Quantitative Risk Management

Other directions will be gradually covered. The emphasis will always be on the current topics dominating the agenda in the industry.

Aims and objectives

The aims of the Centre are:

• To further develop research expertise in the quantitative finance area.
• To provide sound advice on policy and practical issues related to risk management and investment analyses to external bodies across the academic spectrum and the finance sector.
• To foster and achieve international collaboration with academics and practitioners at other institutions and finance houses.

Key research themes

Real-estate risk management

One of the main activities of the centre is establishing a wide-covering database containing relevant data that used to develop and validate models applicable for risk management purposes. The database will be the first of its kind in academic circles and it will include public information such as residential property indices (Halifax, Nationwide, RPX) but also non-public information such as indexes (IPD family, Eurex futures data, OTC forward and total return swaps data from the main dealers). It will also contain ancillary information that is useful in conjunction with property data, such as interest rate curves, inflation indices, macro data. Once this database is established, the second stage will focus on exploring a battery of models that may be applied by real-estate companies, investment houses and hedge-funds for risk management in property markets. Since the property market represents roughly 50% of the entire wealth in G7 countries and in light of the subprime crisis it is envisaged that research in real-estate risk management over the next couple of years will experience a fantastic growth.

Advanced computational techniques for calibration problem in finance

The Centre also focuses on calibration and model risk in financial markets. Model risk has been neglected by the banks and financial literature alike until very recently. Some are even suggesting that the next crisis looming on the horizon is about model risk. Banks are notoriously opaque regarding their trading platforms but the new regulatory regime insists on greater transparency for the benefit of investors and for greater stability of the financial regime. The Centre is developing, analysing comparatively and disseminating new modelling techniques that a) improve the calibration process given the data available and b) account for Knightian model uncertainty. The research covers both low-frequency data and high-frequency data.

Alternative products

The activity at this centre will also cover new asset classes in financial markets that may look esoteric now but may emerge as standard products in the immediate future.