Current Research Issues

By world standards, Australia's financial system is relatively small but highly sophisticated in its development and use of enabling technologies and risk management practices. Currently, major challenges are posed to the integrity and efficiency of this system by the increasingly global and integrated nature of financial transactions, and the potential for widespread adverse effects. Recent examples include highly publicised corporate collapses in Australia, US and Europe, and huge financial losses sustained through the misuse of complex financial derivative instruments.

The quantitative and computational advances in financial modelling and econometric procedures over the last four decades have given us a rich set of tools in the various disciplines involved in financial market research issues. In all of these disciplines there is an ongoing active research agenda that is increasing knowledge and capability to handle more difficult problems specific to each discipline.

The threats to the integrity of the modern financial system however call for a new type of research agenda. Take for example the case of a financial institution incurring huge looses (sometimes to the point of bankruptcy) because of ill-advised complex derivative positions. Such cases often gain wide publicity and provoke a great deal of public comment and debate. For instance; was the failure due an incorrect computation of the institutions risk position, the so called VaR, in which case a financial econometrics perspective is called for' Was the failure a consequence of not understanding complex derivatives, in which case a financial risk management perspective is required' Or perhaps the failure was the outcome of poor communication, poor performance evaluation and flawed management compensation schemes, in which case we are dealing with corporate governance issues' And so forth. In reality the threats to financial integrity involve all of these aspects in some measure or other. The individualistic approach to each particular aspect is of course a necessary research agenda. However the proper safeguard of financial market integrity requires a research agenda that integrates a range of perspectives. Such a research agenda will seek to develop rigorously founded principles and procedures for measuring and managing the risk in complex financial structures, for developing auditing procedures that render transparent financial market transactions, and for informing policy debate on a range of related issues. These elements will define FIRN's research agenda.

Looking internationally it seems this integrated perspective has barely begun. Yet world-wide, the development of ever more complex financial instruments, structures and strategies, and the associated research technologies, continues to accelerate. FIRN with its particular research strengths in the enabling disciplines and focus on collaborative research is well placed to make significant contributions to this important developing area of research. It will play an essential role in placing Australia amongst the key players in the new research technologies for the safeguarding of financial market integrity and the development of associated service industries.