Financial Networks and Financial Stability
In the context of the policy debate regarding systemic risk and financial stability, there is now full awareness of the inadequacy of micro-prudential regulations that are limited at individual financial institutions and the need, in contrast, for a macro-prudential and network perspective, looking at the financial system as a whole. Indeed, it is now recognized that the network architecture plays a crucial role both in the transmission of financial distress and in the strategic interaction of market players. The center will promote research on financial modeling, asset valuation and derivative pricing in the context of networks of derivative contracts among institutions as a fundamental step to fully understand systemic risk and its mitigation. In particular, center will carry out research on financial modeling in the presence of systemic risk. The vision of the center in this regard is that covering the area of asset valuation and derivative pricing in the context of financial networks is a fundamental step to fully understand systemic risk and its mitigation. In this respect, the research focus of the Center will bridge micro-econometric modeling and financial mathematics with networks science, big data and complexity.
The second major line of research carried out by the Finexus Center analyses the role of finance in relation to climate policies aimed to foster the transition to a low-carbon economy. First, research will be carried out to assess exposure to climate policy risks and to model incentives of financial institutions to finance sustainable projects in the transition to low-carbon economy. Second, the Center will coordinate an international Big Data network analysis of the Euro area financial system and its linkages to the energy sectors and more in general to the real economy sectors potentially affected by climate policies, such energy intensive manufacturing and housing. This effort will allow to assess the systemic importance of different sectors of the real economy, the magnitude of the potential shock amplification within the financial system, and the potential role of financial institutions in driving sustainability. In the wake of the Paris COP21 climate negotiations, policy institutions now advocate for “climate stress-tests” of the financial system, but little research on this topic exists. The Center will carry out research and develop tools for policy applications in this area in collaboration with regulators and practitioners.
The Center will also promote the Digital Agenda of the University of Zurich along various lines. Several of its research activities are rooted into policy applications of Big Data science. Moreover, the EU projects coordinated by the Center carry out research on digital engagement of civic society in the policy making process, in the interest of a more balanced representation of societal interests and increased political stability.
Both in Switzerland and on the international scene there is growing interest for the topic of sustainable finance and climate-finance, including: Prof. Hilty (UZH) Chair for Informatics & Sustainability Research; Univ. St. Gallen: Center for Energy Innovation, Governance and Investment; Geneva Sustainability Center; Cambridge Institute for Sustainability Leadership; London School of Economics: Grantham Research Institute on climate change and the environment; Columbia University: MSc. Sustainability Management; Frederick Pardee Center for the Study of the Longer-Range Future; United Nations Environmental Program Finance Initiative. The center will seek collaborations and synergies with many of the aforementioned centers and bring visibility to the DBF.
However, none of these centers analyses the nexus climate-finance under the perspective of the interconnectedness among financial institutions and financial complexity. Our Center will be the first to take this point of view in this area. The ability to bridge research in finance, complexity science and climate will give the center a unique position to contribute in particular to policy areas such as financial stability policies and climate policies, which are becoming increasingly related.