A series of econometric methods and software, designed by a team of
econometricians at Oxford, have been adopted as standard by a large range
of governmental bodies, international agencies and businesses. The
econometric methods are designed to model and forecast high-dimensional,
evolving economic processes facing multiple structural shifts, while the
econometric software (PcGive) implements the resulting
best-practice procedures. The application of these methods have resulted
in more appropriate empirical models, improved robust forecasts, and,
consequently, better decision making by these bodies.
Research undertaken at the University of Manchester (UoM) has contributed
to the development of a new interdisciplinary field, `Mathematical
Behavioural Finance' (MBF), that deals with mathematical models of
financial markets based on behavioural principles. These models go far
beyond the conventional paradigm of fully rational utility maximization,
and reflect a whole variety of patterns of market behaviour. A particular
emphasis is on evolutionary aspects: growth, domination or just survival,
especially in crisis environments.
Impacts can be seen in investment strategies based on MBF that have been
successfully employed in large scale funds, since 2008, by Swiss and
German corporate investors (AllMountain Capital AG and Deutsche Bank).
These strategies have demonstrated high rates of return combined with
relatively low volatility, coping exceptionally well with one of the most
severe financial crises in recent history.
This case study charts the influence of the Risk On / Risk Off (RORO)
paradigm, developed in research at the University of Oxford in
collaboration with investment bank HSBC. Since 2008, RORO has had a
significant economic impact on HSBC as well as wider impact on the
thinking and actions of investors and other global market participants.
Having begun as a specialised research tool within HSBC's foreign exchange
team, the RORO methodology was publicised in the advice that HSBC supply
to a wide range of major fund managers, corporate institutions and central
banks. The research has led directly to a change in the way that asset
managers think about investment decisions, with consequent impact on the
investment and risk management strategies they undertake. RORO is
regularly featured in the financial press and is becoming increasingly
mainstream, with coverage in national and international media aimed at
General insurers are required to have a capital reserve to cover outstanding liabilities, i.e. liabilities
that have been incurred but not settled, or perhaps not even reported. Under the new Solvency II
regulation, adopted by the EU Council in 2009, general insurers now face complex new capital
requirements. These new regulations must be fully implemented by 2016. The development of new
statistical methods led by Dr Bent Nielsen and his co-researchers, in collaboration with the general
insurer RSA, extends traditional forecasting methods, and provides tools by which insurers are
able to meet these new statutory requirements.
Our research team has developed new approaches to classifying demand
series as `intermittent'
and `lumpy', and devised new variants of the standard Croston's method for
forecasting, which improve forecast accuracy and stock performance. These
impacted the forecasting software of Syncron and Manugistics, through the
advice and knowledge transfer. Subsequently, this impact has extended to
and JDA Software, which took over Manugistics. These companies'
forecasting software packages
have a combined client base turnover of over £200 billion per annum, and
their clients benefit from
substantial inventory savings from the new approaches adopted.
As part of our commitment to public sociology (see REF3a), we have
prioritised making Edinburgh sociological research on financial crises
available to wider audiences: financial practitioners, policy makers and
interested members of the general public. This has been primarily via six
essays by Donald MacKenzie in the London Review of Books (LRB)
and two invited articles in the Financial Times, listed in section
5.3. The impact of this research is in enhancing cultural understanding of
finance and contributing to critical public debate. Evidence of its
significance and reach includes: (a) public recognition (eg Prospect
magazine naming MacKenzie amongst the 25 intellectuals with most impact on
the "public conversation" about the financial crisis);
(b) articles by others in prominent sources (the Financial Times
and Economist) drawing on his work;
(c) use of the Edinburgh University research in a major US corporate
(d) reprints of the LRB articles eg in French and German public
affairs magazines, in the booklets accompanying a Swedish exhibition and a
Belgian art video, and in two financial-practitioner magazines.
Professor David Leece's research on household decision making, risk and
mortgage design had a significant influence on a fundamental review of the
United Kingdom's mortgage market carried out in 2003-4, and consequently
has had a major continuing impact on: (i) understanding the role of
mortgage market economics in the financial crisis of 2007-8; and (ii) the
ability of a global investment bank (and the banking sector more widely)
to understand, value and hedge risk in securitised mortgage debt.
Research of Professor Brigo in the areas of credit risk, pricing models
for the valuation of
counterparty risk, and the development of accurate calibration methods of
various credit risk models
has generated significant impact both on public policy and on
practitioners and professional
services. His models were implemented and his calibration methods adopted
in the financial
industry. The significance attached to his work by the industry also
resulted in a collaboration with
the German regulator (BAFIN). Further evidence of his impact can be found
in the fact that a Court
of Law based its analysis in a financial intermediation case on Brigo's
Prof. Pennanen and collaborators have developed mathematical models and
techniques for financial risk management. The techniques allow for
quantitative analysis and
optimization of financial risk management actions in an uncertain
investment environment. The
techniques have been used by the State Pension Fund, Ministry of Social
Affairs and Health, Bank
of Finland and Pension Policy Institute. The techniques have significant
impact on practitioners and
professional services in increasing the awareness and understanding of
long-term financial risks that
are difficult to quantify with more traditional techniques. Beneficiaries
of the developed risk
management techniques include future pensioners and tax payers.
The largest investment banks in London each have thousands of servers
largely devoted to Monte Carlo simulations, and to quantify their risks
and satisfy regulatory demands they need to be able to calculate huge
numbers of sensitivities (defined below) known collectively as "Greeks".
An adjoint technique developed by Professor Mike Giles in 2006 greatly
reduced the computational complexity of these calculations. The technique
is used extensively by Credit Suisse and other major banks, reducing their
computing costs and energy consumption. It has also led to the Numerical
Algorithms Group developing new software to support the banks in
exploiting this new adjoint approach to computing sensitivities.