Written on 26 April 2019.
EDHEC PhD in Finance Newsletter - April 2019
Editorial written by Abraham Lioui, PhD, Professor of Finance, Director of the PhD in Finance Programme, Head of Data Science, Economics and Finance Faculty, EDHEC Business School
Big Data, Machine Learning, Artificial Intelligence, Cloud Computing, Digitalisation... For decades, there was scarce access to quality and broad data, as well as to extensive computational capabilities; nowadays, it seems we have a wealth of data at our fingertips! The obvious danger is datamining with all its destructive potential for businesses.
Management in general, and finance in particular, were, are and always will be social sciences, although some fields are extremely quantitative. This means that any data processing should (i) aim to highlight a mechanism and (ii) provide some guidance on weaknesses and remedies for existing theories.
In a period of scarce data, intellectual speculation was an important and abstract means to understand social interactions and their market impact. Counterintuitively maybe, we believe that critical thinking and very high academic standards are even more important in an era where there is an abundance of data on almost everything.
The coming decades are likely to be amazing for young and confirmed researchers. Testing existing theories and conjectures is going to become easier since out-of-sample cross-validation will be largely feasible. New theories will be created for understanding data samples that we could not imagine having access to only a few decades ago.
The permanent movement implied by continually disruptive innovations raises the bar for professionals. First and foremost, they need to constantly keep abreast of new technologies and statistical tools for supervised and unsupervised data analysis. Moreover, many economic and financial theories were driven by the constraints faced by researchers in terms of data and the ability to provide an empirical test of the theory. These constraints no longer exist today, and as a result theories will be increasingly developed and professionals will need to stay ahead of this trend.
Alternatively, the industry can drive change! While academic research neatly preceded the explosion of the derivatives markets, academia seems to lag today on several topics. For example, attention to blockchains, cryptocurrencies, smart contracts etc., started very recently in academic research after several cryptocurrencies were already on the market and went through several boom/bust cycles. The multiplication of increasingly reliable bilateral trading platforms questions the existence of standard models where official or non-official market makers are key players.
The future of academic research can be legitimately called into question. Is the existing model of young Master’s students starting a PhD right away, and writing papers which are either routine research or small extensions of existing ones, sustainable? Isn’t there room for making academic research and PhD studies more accessible to professionals who have experience from the field, a very deep understanding of the mechanisms and their potential improvement, and an impressive ability to focus on relevant issues?
While both models can coexist, little has been done so far by the academic community to allow professionals to work towards obtaining a PhD while keeping their job. There is huge potential and both communities can benefit from this development in the future!
Professor Lioui teaches Discrete-time Financial Economics in the EDHEC PhD in Finance programme and serves as dissertation advisor for several PhD candidates. His research interests in Finance revolve around the valuation of financial assets, portfolio management, and risk management. His economics research looks at the relationship between monetary policy and the stock market. He currently works on ESG Factor Investing.