Modelling of non-bank financial institutions

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The development of mathematical models for the analysis of financial stability and systemic risk in the financial system has been the focus of a lot of research efforts in the aftermath of the 2007-2008 financial crisis. Much of this research has been focused on the analysis of the stability of the banking system and the regulation of banks. However, the banking system is only a subset of the financial system, which also includes many types of Onon-bankO financial institutions, most notable asset managers such as mutual funds, pension funds, money market funds, hedge funds, as well as insurance companies. These Onon-banksO hold a sizable fraction of financial assets and account for a large proportion of transactions, so an accurate understanding of their role and their interactions with the banking system is crucial for a realistic modelling of the financial system.This project aims at improving our understanding of the role of non-bank financial institutions by exploiting regulatory filings and market data to develop a detailed description of the ecology of the financial system. The first step is a statistical analysis of regulatory data and market data in which we will make use of classification methods and modern methods of data analysis in order to arrive at a stable and interpretable partition of financial market participations into groups following similar strategies and to characterize the financial environment at micro and macro levels. Our aim is to characterize the main categories of non-banks in the financial system and identify their main features and interactions.We take advantage of machine learning techniques to characterize the behavior of non-banks by exploiting all the temporal and spatial information that we can extract from holdings and market data.A second step will be to model the behavior of these non-banks in a mathematical framework which lends itself to analytical study or simulations which may be useful for stress testing and risk analysis, and for examining the consequences for systemic risk and financial stability. This project falls within the following EPSRC research areas: artificial intelligence technologies, statistics and applied probability.Fidelity Investments Inc. is the industrial partner for this project.