FOC (Forecasting Financial Crises) is a scientific project funded by the European Commission's FET Open Scheme for ICT (Information and Communication Technology). The focus of the research is to significantly improve our understanding of systemic risk in financial markets and if possible to forecast global financial instabilities.
FOC aims to provide a novel, integrated, and network-oriented approach to understanding financial crises. This includes a theoretical framework for measuring systemic risk in global financial markets and financial networks, and a collaborative ICT platform for monitoring systemic fragility and the propagation of financial distress across institutions and markets around the world. This will enable experts to evaluate different algorithms and models for forecasting financial crises, and make it possible to visualise possible future scenarios interactively.
The video provides a brief introduction to some of the key scientists participating in FOC, and sketches out the aims and approach of the project.
The FOC consortium comprises the National Research Council of Italy (CNR), the University and Politecnico delle Marche (UNIVPM), ETH of Zurich (ETHZ), the City University of London (CITY), the University of Oxford (UOXF.MQ), Barcelona Medialab (BM) and the European Central Bank (ECB).
The main goal of this project is to provide a framework based on novel theoretical approaches and innovative software tools that allows us to improve significantly how we understand and deal with systemic risk. These instruments can then be made available to policy makers to help them formulate suitable countermeasures so that the effects of a crisis can potentially be avoided and/or mitigated.
A key measure of success for the project will be whether we are able to identify a set of effective indicators that reliably characterise the state of different financial systems, can monitor their real-time evolution, and are able to explore possible future scenarios following a given countermeasure. Satisfying these objectives requires several competences, including scientific and technical expertise, but also expertise and experience in the domain of policy-making.
As a first step, we will need to provide a coarse-grained description of real financial market behaviour by filtering and analysing information that is available on the liquidity and solvency of the main actors in credit markets. In addition, network analysis will be used to map financial relations between different actors, in order to assess systemic properties like robustness and resilience. The starting point for this activity will be the data collection specified in WP1 (Data Collection and Database Consolidation), together with the collection of any additional information that allows us to relate financial interactions and markets with spatial locations and geographical maps.
Starting from this notion of a cartography of risk, we then move to the second step, and develop an online platform that allows us to visualise and elaborate this information, in a manner that is analogous to approaches taken in other international projects that have recently started. In particular, we will be in contact with various companies (e.g. palantirtech and anacubis) in order to ensure compatibility between our project and similar state-of-the-art activities.
A key capability of the platform will need to be the real-time ability to interact with data by computing and visualising structures and measures of interest, such as the communities formed by financial institutions, the robustness and stability of the system, volume and size of the exchanges, or chains of institutions that could generate bankruptcy avalanches. In order to make collaboration within the consortium effective, researchers from different institutions will be able to upload models and run simulations on the online platform. This activity constitutes the core of WP3 (Network Visualisation and Systemic Risk Forecasts).
The third and final step will be to develop methods that can help forecast the future evolution of financial systems, coupled with the possibility of testing the effect of policy actions such as varying the interest rate, bailing out a particular subset of institutions, facilitating trade etc. While the ultimate decisions taken with respect to fiscal policy lie in the hands of policy makers, the instruments developed by FOC are intended to support such decisions by providing meaningful quantitative results in a short time.
The detailed work underpinning the development of tools for decision support will be undertaken in WP2 (Agent-based Modelling) and WP4 (Empirical analysis and model validation), where the models that will be used to these purposes will be produced and tested. While the online platform will in principle be the final deliverable of the research and development activity for FOC, we believe that it is crucial already to start testing a prototype during the early stages of the project. This means that all these activities will proceed through a continuous feedback from data analysis to models, validation and visualisation and back to data analysis.
The management of this workflow will be ensured by the activity of WP5 (Management and dissemination). In summary the structure of this project is quite intuitive and can be described as follows: population and consolidation of a database of financial markets (WP1), modelling systemic risk (WP2), and empirical analysis of data and validation of the models (WP4). All this expertise will be put together in a unified framework in order to be used by policy makers or researchers not involved in the project (WP3).
Forecasting Financial Crisis