Close
How Deadly is Financial Leverage?
By Lucy Thompson, on 4 January 2023
Financial leverage is built on the idea of spending money to make money – buying a home or investing in a business, for example. This blog by IFT PhD student Philipp Wirth summarises a recent seminar on the “deadly” nature of financial leverage when applied to COVID-19 and care home deaths. The paper by Peter Morris and Ludovic Phalippou (Said Business School, Oxford) and Betty Wu (Adam Smith Business School, Glasgow) examples how and why leverage must be calculated properly to support future policy responses.
March 2020 proved to be a defining month for humanity all around the world. COVID-19 would affect hundreds of millions of people in the months and years to come, but March was the month that the UK, like many other countries, introduced a nationwide lockdown to stop the disease from spreading. The most vulnerable members of our society were the elderly, the demographic which still accounts for most COVID-19-related deaths. A recent report of the ONS shows that for 2021, COVID-19 was the second highest cause of death among care home residents in England and Wales.
Machine Learning in Market Abuse Detection
By Lucy Thompson, on 12 December 2022
The world of finance is changing ever more quickly, thanks to the emergence of new technologies. Some of these changes are advantageous; the accelerated adoption of machine learning and AI is increasing efficiencies in risk and assessment, underwriting and claims processing. But technological developments also pose risks to financial institutions. Professor Fabrizio Lillo’s work with Consob, the Italian financial authority, is using machine learning for good, to detect instances of market abuse.
There are several different kinds of market abuse, loosely defined as the circumstances in which an investor in the financial market has been unreasonably disadvantaged directly or indirectly by others through their behaviour. These include price manipulation, spoofing and front running.
Lillo’s work focuses on instances where traders use information about a listed company that is not publicly available, a kind of market abuse known as insider trading. If traders are made aware of confidential information about a company in advance, it is then relatively easy for them to trade in a way that guarantees a profit. Typically, insider trading occurs around what is known as “price sensitive events” when a company makes an announcement – say, the appointment of a new CEO or a takeover bid. Access to this kind of information in advance of its announcement is strictly prohibited but it can occur, causing some investors to make larger, unfair profits in comparison to their peers. Instances of insider trading can be penalised throughout the world, but it’s often difficult to identify them. Read the rest of this entry »
Is it really 100% recyclable?
By Lucy Thompson, on 30 November 2022
We see “100% recyclable” labels everywhere – on yoghurt pots, containers, and plastic bags. But are they true to their promise? And how can we work to promote plastic recycling not just among individual consumers, but more widely in industry? Dr Chao Liu, Lecturer in Decentralised Finance and Blockchain at IFT, presents the issue and the Plastic Credit system he has devised.
Lightweight, cheap to produce and durable – plastic has become embedded in our daily lives and universally throughout industry. There are many types of plastic materials used across a range of products. PET is the most common material for clear plastic bottles, for example, and PP can be used for sealing film, packing tape, and single-use straws.
Manufacturers use a circular triangle with a number inside to identify plastic type as shown. Each type of plastic material is identified as widely recyclable, recyclable, or not recyclable. But what do “Recyclable” and “Widely Recyclable” actually mean? Is it 10%, 50%, or 90% recyclable? And what happens to non-recyclable material during processing?
AI in finance
By Lucy Thompson, on 16 November 2022
If ‘data science’ is ‘statistics re-invented’, then arguably artificial intelligence must go further than that to differentiate itself. IFT’s Director of Research, Professor Sir Alan Wilson, reflects on the overlap between data science and AI, and what more it can offer. Prof Wilson reads this as the ability to offer insights from the analysis of large data sources or ‘big data’ that goes beyond statistics.
An introductory step is to sketch what AI can do and what it can’t do. Through associated methods in mathematics, statistics and computer science, combined in new ways, AI can see, hear, read, translate and write. These are remarkable achievements and can themselves transform many business processes. Many of these are being applied by banks, for example, in serving their customers. What AI can’t do is ‘think’. This led Michael Jordan to argue, in his blog post Artificial intelligence: the revolution hasn’t happened yet, that we should neglect the earlier ambitions to create a human-imitative ‘thinking’ AI, and convert AI to IA: intelligence augmentation.
If we continue to follow Jordan, we can note that much of AI is ‘machine learning’. This allows us to identify hitherto undetected patterns or structures from data, thus providing insights and augmented intelligence. This can be dramatic: DeepMind’s AlphaGo systems which recently showed how to reveal the structures of protein folding is a remarkable case in point. The simplest kind of structures are clusters, for example of population types, which provide the basis of new marketing algorithms. Another kind of product is ‘anomaly detection’ which has obvious applications in finance in relation to money laundering and fraud.
There are three kinds of machine learning: unsupervised, supervised and reinforcement learning. Unsupervised throws machine-learning algorithms at large databases and invites the delivery of possible clusters; supervised learning starts with a cluster-labelled data set and seeks to position elements of new data into these clusters; reinforcement learning combines new data with old in such a way that the cluster definitions can be improved – and in this sense, the system ‘learns’ as data is added.
Networked markets: the evolution of high-frequency trading (HFT)
By Lucy Thompson, on 9 November 2022
Financial markets have undergone a deep reorganisation in the last 20 years. A mixture of technological innovation and regulatory constraints has promoted the diffusion of market fragmentation and high-frequency trading. In this blog, IFT PhD student Zihao Liu reports on the inaugural seminar in IFT’s Agora Seminar Series – “High frequency trading and networked markets” with Professor Rosario Nunzio Mantegna.
Due to the high-speed development of FinTech and technical innovations in recent years, the operation of the global financial market has changed beyond recognition. Ever more market participants are beginning to use powerful computer algorithms to execute and complete orders in mere microseconds. The new stock market has changed the traditional ecology of market participants and market professionals.
With the development of strategic trading decisions based on high-frequency trading, the fragmentation of markets has occurred. Contemporary stock markets are now “networked markets” where liquidity provision of market members has statistically detectable preferences or avoidances.
Finance, technology and interdisciplinarity
By Lucy Thompson, on 2 November 2022
The Institute’s USP is rooted in linking research in finance and technology – the latter in two senses, technology in finance itself, and technology in the wider economy – the customer of financial services. A subsidiary aim is to link academic research with industry and the public services. This stance demands interdisciplinarity and it is useful to explore what this means. In this contribution, our Director of Research, Professor Sir Alan Wilson, presents the framework for interdisciplinarity offered in his recent book, Being interdisciplinary.
A first step is to define a system of interest for a research project. In broad terms, this will demand specifying the components of the financial services ecosystem, and those of its customers that are relevant to the project. To fix ideas, consider a project to explore the maximisation of ESG objectives in portfolio construction by an asset management company. The system of interest is based in the elements of the portfolio and hence the wider economy, risk and uncertainty, the companies own market, and the elements of ESG to evaluate those dimensions of the portfolio. The drive into interdisciplinarity comes from posing the question: what is the requisite knowledge base needed by the company to be efficient and effective? This will embrace all the elements of portfolio management (and hence mathematics and statistics), the companies represented in the portfolio (economics, geography and business – national and international), the government and regulatory context (hence politics and public administration), and the elements of ESG (environment, including climate change, the social impacts of investment, and governance – business again). This is a huge agenda, demanding both breadth and depth in the company’s staff and access to top-class reference material. Parcelling the knowledge into disciplinary siloes will be a very inefficient way of handling this hence the need for interdisciplinary teams. There is a big challenge here that can be research-informed.
Transforming public services through collective entrepreneurship and sustainable finance
By Lucy Thompson, on 19 October 2022
In the following blog, IFT PhD researcher Filippo Addarii presents his rationale for engagement with sustainable finance. His story is that of the first Social Outcome Contract (SOC) in Italy for the work inclusion of prisoners. As an illustration of his attempt to put reformist theories into practice, it shows that the business of “changing the world” for good requires us to leverage market forces to serve a purpose that is more than profit.
The SOC – also referred to as a Social Impact Bond (SIB) – was conceived by a coalition of policymakers, financiers and charities to drive innovation and efficiency in public services and strengthen government to fulfil its mission. In essence, the SOC is a partnership between public and private sectors in which the former sets the goals – in this case, social outcomes – and the remuneration for having achieved them. The private sector provides risk capital, delivers services and manages the whole process. A third party, often academia, carries out the evaluation of the results that trigger payments. Application of the SOC is justified when straightforward state and market solutions fail or are not possible.
This is the theory – evidence reveals that real-time implementation of a SOC can vary greatly based on context. The first SIB/SOC was piloted in the UK in 2010 and since that time, the SOC model has been implemented across the world, with examples now totalling 251 worldwide. A SOC is the flagship product of impact investing, the international movement to put finance at the service of public value creation. It can be categorised as a form of sustainable finance.
My company, PlusValue, has been involved in the conceptualisation and implementation of the first SOC for the work inclusion of prisoners in the private sector in Italy.
Italian law allows prisoners to work outside a prison while serving their sentence, if they are deemed fit by a judge. There are 60,000 prisoners in Italy, most of them on short term sentences. At least 4000 of these prisoners meet the criteria for employment. There is overwhelming evidence about the effectiveness of employment in reducing re-offending rates and fostering social inclusion. Furthermore, scaling employment of the prison population would not only reduce costs of the prison system (approx. €3bn annually) but would also reduce the need for new prisons. Read the rest of this entry »
Welcome to the Parnassus Blog!
By Lucy Thompson, on 5 October 2022
During the summer heat in Rome, Professor Francesca Medda, our Institute Director, likes to escape to the Vatican Museum. In this blog, she reflects on why we have named this platform Parnassus, in celebration of Rafael’s painting by the same name. Rafael’s work pictures a host of artists from Sappho to Dante, surrounded by the muses on the mythological mountain, Parnassus, where the arts and study are protected. This painting is our inspiration – a blog that will be a sounding board for new ideas and discussions on digital finance.
We live in chaotic times. Covid-19 is not yet over, the war in Ukraine rages on, and the climate crisis is not only accelerating the digitalisation of the financial market, but also highlighting the chronic difficulties – of time and sometimes complex procedures – that we face to supply capital from conventional financial services.
The implementation of effective finance and economic solutions calls for responses to several preliminary concerns, including applicability, types of technology, time frame, budget constraints, acceptability and awareness of stakeholders, and declining central government revenues. Solutions must also correspond with levels of risk and the uncertainty posed by an unknown future. Importantly, however, these concerns cannot be resolved by ‘one-size-fits-all’ or ‘try-everything’ strategies for digital transition, particularly when future uncertainty is likely to exacerbate social and income inequality.
Given the interdependency characterised by the financial market today – and noting that digital silo-based solutions have fallen short of expectations – we can take the position of curatorship in this era of exponential change, as in The Parnassus of Rafael, where solving problems takes priority over incremental solutions.
From the perspective of a curator, we are indeed on the cusp of finance change and new technologies in digital finance that arise from the need for sustainable and efficient financial market systems. However, managing innovation for the financial market is not easy-peasy, given the current and predicted global trends. These include:
- demographic and social imbalances, often dramatic and diverse in different countries, from sharp growth in migration patterns in many emerging economies, and aging and population decline in cities of several of the richer economies;
- risks and hazards in the form of natural and human-caused disruptive events, particularly to infrastructure, and to assets that are complex systems and therefore potentially most vulnerable to threats; and
- issues relating to resource protection and steady supplies required to maintain productivity and welfare.
Writing from the vantage point of IFT, it seems that these complex issues can be transformed from challenges into opportunities only if we focus on research and apply our knowledge towards enhancing access to information and communication technologies, to the better management of resources, and to improving our financial systems by reducing waste, to mention just a few. Fortunately, the research panorama is very fertile; scholars from a variety of organisations, not only from established academic institutions, are responding to these challenges by developing solutions and merging instruments that leverage excellence in research and knowledge and also within the social and environmental impacts they produce. In this context, our blog is indeed a sounding board, a protected area, as in The Parnassus, where we can benefit from the exchange and development of ideas.
This blog also aligns with the spirit of the Institute of Finance & Technology’s work and research generally. Three words encapsulate our objectives and vision.
Searching for success: job hunting for international students
By Lucy Thompson, on 15 August 2022
Ting Chen, a recent IFT graduate, presented her key recommendations to ensure a smooth job search process.
On Friday 12 August, we were pleased to welcome back an alumna of the Institute of Finance and Technology, Ting Chen, to share her experiences of job hunting as an international student.
After graduating from the MSc Banking and Digital Finance in 2021, Ting completed an internship with Progressive Equity Research, which provides investment research for a wide range of small & mid-cap UK companies. She was then offered the role of Graduate Analyst at Barclays, where she started work in early August 2022.
Creative Investing: New Paths for Venture Capital and Private Equity
By Lucy Thompson, on 8 August 2022
On 17 June 2022, IFT assembled a panel of experts in finance and technology to discuss how the landscape of investment must change to meet the challenges of the times. IFT PhD student Millie Deng recaps what we learned.
The Covid-19 pandemic has been a turning point for humanity, bringing world economies to a standstill and highlighted our vulnerabilities. The Russia-Ukraine conflict has further amplified uncertainty and instability. Venture capital and private equity are engines of change and growth in terms of the way we invest in businesses. But these investments, particularly of Venture Capital (VC), are vulnerable to volatility as they follow economic up and downturns.
The last three years have showcased this dynamic like perhaps no other period in history. And yet, despite the universal and potentially long-lasting economic, social, and political impacts of Covid-19, 2021 was actually a record-breaking year for VC. The International Monetary Fund was able to raise its projection for economic growth in 2021 from 5.5% to 6%, and project 4.4% growth in 2022. This was partly based on how well the pandemic continues to be controlled, and the effectiveness of global economic policies to cushion the damage to the markets. Now, we must ask how we continue to recover, while reconfiguring existing systems to be resilient to shocks.