National Programme of Research and Capacity Building in Quantitative Finance and Education (FINE)

Executive Summary
The project aims to form an enduring partnership amongst academics in the National Mathematical Centre (NMC), Abuja, Nigeria; Mathematical Sciences, Finance, Economics and related departments in Nigerian Universities, professionals in the financial services industry, government and private departments and organizations, with immediate interests in establishing Nigeria as a centre of excellence in quantitative finance and financial risk management studies in Sub-Sahara Africa. The project will involve research collaborations among Nigerian and international academics and professionals in these fields of specialization, and will be coordinated by staff of the National Mathematical Centre, Abuja, Nigeria and Sheffield Hallam University, United Kingdom. The core aims of the programme are to: 1. Map project ideas and related studies to strategic national and regional economic development agenda e.g. the Millennium Development Goals (MDGs), Nigerian NEEDS, Vision 2020 initiatives, and develop a fitting training programme for a cadre of cross-disciplinary professionals in these fields of immense strategic importance to Nigeria and Africa 2. Conduct cutting-edge theoretical and applied research on the broad topic: Studies in Quantitative Finance, Financial Risk Management and Change in Global Financial Markets, with a Focus on Emerging Markets of Sub-Sahara Africa 3. Establish a state-of-the-art multidisciplinary College of Doctoral Researchers jointly supervised by Nigerian (Sub-Sahara African) and international scholars in these fields, and fore-grounded by training workshops that discuss a workable blueprint for effective, skills-deep knowledge transfer and on-time graduation of the students 4. Develop specialist academic resources in the areas, including textbook-research monographs and case studies which are adapted to contemporary African Emerging Markets experiences and needs 5. Use experiences from the project to undertake contract research, consultancies, and training workshops for specific industry sectors and institutions in Nigeria, Sub-Sahara Africa and global client publics. In brief, the project set-up is planned to last for five years with the funding requested. The project is planned to be a continuing self-sustaining national programme of high-end financial manpower development in Nigeria, coordinated by the National Mathematical Centre. Given the huge scope of the project, we note that distinct work patches in the delivery will be implemented jointly with other partners with sound experience and capabilities in research and consulting related to the patches. Overall project management by the Project Leader will, therefore, reflect this deference to expertise, based on sound project management principles. Coordination by the NMC should be seen as crucial especially for the academic side of the project and the liaisons with delivery teams from the universities.

Outline of the project timeline

Year 1 activity is focused on the strategic design of the entire programme by collaborating partner institutions and will deliver (blueprints for) Objectives 1, 2, 3 & 4 mainly Year 2 consolidates work in Year 1 Objectives 2 & 3 and delivers work on Objective 4 mainly Year 3 continues work in Years 1 2 leading to draft copies of some of the texts in Objective 4 and cases in Objective 5 Year 4 continues work in previous years and intensifies work in Objective 5 to grow client bases, projects and cases and supplement project funding Year 5 consolidates all gains from the project, generates new programmes/MOUs from client-partners (specialist MSc/MBA programmes) and formulates associated business models for monetizing the programme offerings.

Proposal Details
Description of the Applicant (see annex I for brief biopics) General Problem Statement/Needs Assessment
The current global financial crises suggest an urgent need by countries, especially emerging economies, to devise strategies and action plans for preparing a new generation of financiers and quantitative analysts. All relevant stakeholders in a national economy apart from business schools should have interests in helping to mitigate future risks to businesses and the financial system, by ensuring that bankers, insurers, brokers, and financial clients undertake the particular features of modern financial products which they create or purchase. This problem is exacerbated by the known fact that CEOs of many financial services companies have a general management education and retailing background, and even when they have banking and finance backgrounds may not be quantitatively well prepared to understand the risks associated with complex financial products. Hence, a more pervasive retailing culture exists in top management of some of these institutions and tends to reward career progress away from the financial engineering niches. The adverse effect of this is the continual diminution in the numbers of quantitative experts in the banks, insurance companies and other financial services organizations, including also related government organs. It is therefore extremely vital to the future of our economy that specialist research and broad-based training be instituted in the country and continent in the areas of financial engineering, quantitative financial economics and risk management. At the point in the future when a critical mass of these experts are embedded in the Nigerian and continental financial systems, it will be easier to recruit executive and non-executive board members who by understanding the financial system and products better can restrain 'overweening' CEOs. This will improve the firmament of corporate governance in the country. This project seeks to address these problems and prospects through a balanced focus on both high-end academic research that has direct links to financial practice, but also deep practical understanding of valuation, risk assessment, risk management, liquidity management and banking models, vital for professional management of risks, returns and liabilities in the 21st century global financial system.

Specific Problem Statement/Needs Assessment in Nigeria and (Sub-Sahara) Africa

As argued above, there is a felt need to develop a cadre of academic researchers and professionals in high finance who are steeped in the art and science of skilful management and decision-making in the new financial services industry. The hallmarks of the new industry include financial reforms introduced by the Central Bank of Nigeria (CNB) and their links to similar reforms in the Nigerian Stock Exchange (NSE). It is not so much a problem of lack of the fundamental mathematical skills and related knowledge of other quantitative fields. It is lamentably a problem of the channelling of such intellectual resources to the right kind of quantitative finance ideas and their applications. We agree that this right kind of quantitative finance ideas should be mapped to the national economic development efforts as indicated, and directly inform relevant middle-to-senior manpower development in these areas of strategic national interests. We also agree that rightness implies an orchestration of efforts amongst significant stakeholders in the country including government institutions, higher educational institutions (HEIs) and client publics, such as the CBN, NSE, financial services firms and related professional associations, professional academic associations e.g. the Nigerian Mathematical Association (NMA), the Nigerian Statistical Association, with insights from similar international organizations. An example of such need was a recent statement by the management of Access Bank plc to the fact that we do not have [enough] experts in Nigeria who are competent in the use of complex derivative instruments in hedging financial risks. The comments suggested a need to establish a university or specialist institute to train such experts in the country. We feel that this all-involving initiative directly answers to that need.

Rationale for the objectives

With respect to the specific objectives of the project, we feel that they are the minimum set of objectives that need to be achieved in tandem in order to substantially address the above problem. It is necessary to align the project to the stipulations of the key Nigerian NEEDS, MDGs and related agenda, if we are to secure valuable buy-in from the nations policy organs and make the project gains reach a wider gamut of stakeholders. This is the rationale for the first objective. Within this objective we also feel that the cadre of quantitative finance professionals to be trained through project FINE are materially distinct from what currently exists in the country. They should be crossdisciplinary in outlook, deeply trained in a main area of focus, able to formulate problems and devise cogent solutions from their training, among other characteristics. They are not merely graduates of quantitative disciplines, but equipped with an understanding of the cutting-edge results of quantitative finance, financial risk management and investing at the outermost boundaries of mathematical sciences, finance, economics and business. These ideals are reinforced in the remaining objectives. Objectives 2 and 3 signal the need to institute a long-running programme of research in all the above fields, based on such a broad theme, so broad and seep as to necessitate the collaboration of experts and professionals from different disciplines. It is of interest to moor the theoretical and applied ballasts of project FINE to the current and anticipated needs of Nigerian and African emerging financial markets. We know from the dense literature on stock market analyses, development finance, quantitative financial economics and their mathematical sciences underpinnings that there are interesting differences, problems and prospects amongst the triad of financial markets emerging markets in general compared to developed markets, the emerging markets of the BRIC countries (Brazil, Russia, India and China) and the developed markets in particular, and finally the emerging markets of Africa/Middle East and those of the BRIC countries. The systematic research of the implications of these differences in the staging, analyses and management of financial risks and investments in Nigeria and Africa is, therefore, an imperative area of need in the country. 3

Objectives 4 and 5 reinforce these ideals via the production of indigenous academic resources, case by case applications and the immersion in practice that solves associated problems for client-publics.

Proposed Scope of Work

The project is planned to realize two main success criteria depth of expertise/capacity building across the nation and active joined-up thinking/involvement of significant stakeholders nationally and internationally. Why mathematical sciences and quantitative finance Mathematical sciences underpin so much of the content and approach to understanding other fields especially finance, investing, applied economics, quantitative financial economics, insurance, banking and business. The current global financial crises highlight the need for expertise in managing financial risks and investing decisions on which the growth and survival of financial clients depend. In addition to the kind of general financial literacy afforded by a plethora of traditional MBA and MSc programmes in the world, we need specialist programmes that explore more deeply the quantitative (as well as qualitative) dimensions of these fields and how they inform practice. These programmes should also cater to the specific characteristics of such niche markets as financial, energy, and communications sectors, for example, through unique research topics, cases and contract research in the sectors. Importantly, the particularly awful lack of indigenous textbooks and research monographs in these fields in the country must be addressed. This way, the collaborating academics and professionals will contribute intellectually to resource development as well as generate fodder for their career advancements in the fields. It is also vital to understudy the approaches to innovate the pedagogy of these fields in order to cascade effective training in the fields to all levels of learner-teacher-professionals, via seminars, formal lectures associated with MSc, MBA and doctoral programmes, and customized training workshops for client institutions. To this effect the mapping of the research in Objective 2 emphasizes doctoral projects and training programmes on the pedagogy of the disciplines. It is hoped that this emphasis will introduce changesetting innovations in the learning and practice of these fields, linked to the professionalization of knowledge transfer and problem solving skills in the fields.

FINE will involve the skills and commitments of an inter-university consortium of lecturers, professionals, and other stakeholders in a range of project activities which include: 1. Initial knowledge exchange visits (locally and internationally) and desk research among collaborating institutions and of existing programmes aimed at achieving the intents of Objective 1. 2. Forming multidisciplinary research clusters and collaborations among teams of academics, in the contributing fields, who work on distinct patches of the research with associated PhD students; commencing initial research aimed at a full characterization of and calibration for investing and decision making of Nigerian and other African financial markets; researching global change phenomena in light of, say, what the world would look like in the year 2030 and the implications of these for modern finance theory and practice; formulating specific research directions and topics within the patches so formed in previous activities, and assigning appropriate supervisors and students to the topics; attracting top quality students to the programme; sourcing funding for research studentships; running awareness seminars across the country (centrally in Abuja and then within the six geopolitical zones of the country) towards these objectives; providing relevant training on a blueprint for the consistent supervision of the projects. These activities are aimed at achieving the intents of Objectives 2 & 3. See further details below on our initial mapping of the research programme to areas and topics. 3. Conducting stakeholder meetings and visits aimed at securing and producing contract research projects; developing vital knowledge ware and cases; creating the business models that underpin execution of these products, services and training experiences; running training workshops and seminars on professionalization of knowledge transfer using these artefacts; exploring further avenues for continuing the knowledge transfer, capacity building work and long-term sustainability of the programme. These activities are pursuant to achieving Objectives 4 & 5. 4. Activities to widely disseminate the project results to key stakeholders, learning and professional communities via graduate lectures, summer schools, conferences, training, publication of research papers, and so on.

Proposed Budget (indicative): Idea generation meetings (sandpit) and related travel costs to & from UK and within Nigeria plus time spent on crafting the detailed proposal and work programmes N=1000,000.00 Initial project workshop, knowledge exchange visits, desk research and surveys of existing provisions Per-diem N=16,875,000.00 Honoraria N= 9,000,000.00 Transport N= 6,100,000.00 Total N= 31,975,000.00 Workshops including objectives (a) PARTICIPANTS 1800 Participants Board & Lodge Transportation Tea & Lunches Conference materials Sub-total all meetings and development of blueprints and activities related to the

N=75,000.00 N=30,000.00 N=15,000.00 N=5,000.00 N=125,000

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Total N125,000.00 X 1800

N=225,000,000.00

Resource persons Overhead costs for international lead @ N=8,000,000.00 per year N=40,000,000.00 Board & Lodge N=4,500,000.00 Transportation N=1,440,000.00 Honoraria N= 816,000.00 Tea & Lunches N= 630,000.00 Sub-total N=47,386,000.00

Initial funding for research students 50 students at N=1000,000 per student for 4 years (spread across the 36 universities in Nigeria) N= 200,000,000.00 Activities related to Objectives 4 and 5 including post-project reviews, workshop and dissemination of results Per-diem N=16,875,000.00 Honoraria N= 9,000,000.00 Transport N= 3,600,000.00 Total N=29,475,000.00 Resources (including core texts), hardware & software and costs of developing all core texts in Objective 3 N=50,000,000.00 Contingencies N=31,133,600.00

GRAND TOTAL N=415,969,600.00 (Four hundred and fifteen million, nine hundred and sixty-nine thousand, six hundred naira only)

PROJECT TEAM 1. Professor Sam Ale NMC 2. Professor A. R. T. Solarin NMC 3. Professor P. Onumanyi NMC 4. Dr. J. O. Daniel NMC 5. Prof. I. O. Adetula NMC 6. Prof. M. O. Ajetunmobi NMC 7. Prof. J. A. Ogidi NMC 8. Prof. J. S. A. Adelabu NMC 9. Prof. C. Adeyeye NMC 10. Prof. B. O. Oyelami. NMC 11. Prof. Patrick Ezepue Sheffield Hallam University, Sheffield 12. Prof. Temi Abimbola University of Warwick, Coventry. 13. Dr Eric Ofoedu Nnamdi Azikiwe University, Awka, Anambra State, Nigeria (NAU) 14. Professor Chika Moore NAU 15. Professor Sydney Onyeagu NAU 16. Professor Polycarp Chigbu University of Nigeria (UNN) 17. Other members from the CBN and the Nigerian university system

Appendix 1: Initial mapping of advanced mathematical research ideas into strands, topics and related notes This appendix foreshadows the depth of theoretical research envisaged in the project by using the mathematical finance field as an example. Similar detailed programme will be developed for other fields highlighted in the proposal notes. Even so, the mathematical finance topics will be made practically relevant to emerging market needs by a core strand in financial engineering following ideas in Ezepue & Solarin (2008)
Studies in Quantitative Finance, Financial Risk Management and Change in Global Financial Markets with a Focus on Emerging Markets of Sub-Sahara Africa The rationale for this research theme is to institute multidisciplinary research collaborations among teams of academics, mathematical scientists and (their) PhD students in Nigeria and the UK, aimed: Firstly on a full characterization of and calibration for investing approaches and decision making of Nigerian and related African financial markets. Secondly on researching global change phenomena in light of, say, what the world would look like in the year 2030 and the implications of these for modern finance theory and practices, among other issues (a longer term programme of study).

These studies could start with case studies of different market universes and sectors in the Nigerian Stock Exchange e.g. financial services, oil and energy sector, real estate, the equity (derivatives) markets, capital markets etc. A key aspect of the studies is detailed empirical finance work aimed at modelling and analysis of selected emerging financial and stock markets, with a focus on the following dimensions: Using econometric methods to investigate empirical finance characteristics of the markets Linking the results to parallel studies and known results in development finance, monetary and fiscal policies of the developing countries Focusing the study on such issues as market efficiency, valuation, predictability, speculative bubbles, anomalies and volatilities, among others Testing received theories of quantitative financial economics on the selected market niches, compared to results in developing economies Deeply applying the implications of the results for proactive macro- and micro-economic decision making in emerging markets, and their affects on development economics and finance etc.

Importantly, academic research in these areas will enable us evolve a syndicate of disciplinary experts in Nigeria and UK, who will co-produce graduate texts that dwell sufficiently on emerging markets research for e.g.

Advanced Financial Risk Management in Global Financial Markets: Theory, Models & Applications Statistical Modelling of Financial Markets: Theory, Critical Insights and Applications Quantitative Financial Economics in Emerging Financial Markets: Theory, Critical Insights and Applications Topics in Stochastic Processes and Their Applications in Finance and Investment The Art and Science of Financial Consulting: Using Serious Creativity to Create Wealth in Financial Engineering

Strategic Financial Research & Consulting Services: Financial Decision Making is Theatre The Pedagogy and Practice of Mathematical Finance Pathways for Transformational Financial Education and Economic Development in Nigeria

Collaborators This theme is hugely eclectic and will draw from the goodwill of quite a number of stochastic modelling experts, mathematical physicists and analysts, applied economists, finance and investment experts and professionals etc. Indicative funding sources in addition to main national funding We will seek funding from a wide range of stakeholders for this theme e.g. the CBN, African Development Bank, Central Banks, Stock Exchanges, banks, (multinational) firms in different sectors, and related international funding bodies. Individual researchers will also be prepared to fund some aspects of the research e.g. fees, travel as may be required. Examples of research directions/topics to be undertaken by researchers in collaborating universities [1] Some contributions to stochastic modelling, integrated risk analysis and communication [2] Some contributions to mathematical analysis (including functional analysis) and quantitative risk management (and/or mathematical finance) [3] Some contributions to stochastic modelling in finance, insurance, economics, banking and business (FIEBB) [4] Some contributions to statistical aspects of data mining with applications in finance and investing [5] Some contributions to extreme value theory (EVT) and copula methods in quantitative finance [6] Some contributions to multivariate statistics and their applications in finance and investing [7] Some contributions to time series and stochastic processes in emerging financial markets [8]Topics in stochastic processes and their applications in finance and investing [9] Topics in data mining and business intelligence with applications in finance, insurance, economics , banking and business (FIEBB) [10] Some contributions to the pedagogy of mathematical sciences (a more general and less quantitative research area of strategic importance to Nigeria).

Detailed remits of the above topics [1] Integrated Risk Analysis, Business Intelligence and Communication (IRABIC): This research strand which will mimic combined perspectives from Putnams, Gigerenzers and Kahnemans works at the interface of risk appreciation, heuristics, business intelligence and data mining, psychology of communication, behavioural economics, decision theory, game theory, integrated risk management solutions etc. The strand will also generate text-monographs/journal papers that disseminate research results and associated best practices on IRABIC. [2] Stochastic Analysis and Mathematical Finance Theory and Applications (SAMFTA): This strand will explore such topics as: statistics and probability theory; infinite dimensional models; shot-noise effects, incomplete information issues; application of SDEs in Hilbert spaces, including Lvy random fields, to credit risk, CDOs, equity and energy markets; nonlinear filtering theory for pricing corporate securities under noisy asset information; stochastic calculus including stochastic differential equations; stochastic analysis, mathematical analysis, functional analysis, ordinary and partial differential equations; mathematical physics; approximation theory; measure and integration theory; applied mathematics; quantitative finance; stochastic programming & stochastic optimization models; quantitative risk management; mathematical foundations of investment and risk management, etc. The strand will generate textmonographs/journal papers that disseminate research results and associated best practices on SAMFTA. [3] Stochastic Modelling in FIEBB (STOMFIEBB): This strategy implements fundamental and applied research on the interface among: stochastic processes, including branching processes; applied stochastic modelling; finance and investing; insurance and actuarial science; financial economics, including high-frequency finance; corporate finance; financial accounting; business analysis, forecasting and performance management; complexity and chaos theory, including fractals; bank financial management; business and marketing, including conjoint analysis, structural equation modelling, customer analytics etc. The strand will also generate textmonographs/journal papers that disseminate research results and associated best practice on STOMFIEBB. [4] Statistical Aspects of Data Mining (STADAM): This strand will implement theoretical and applied research in all techniques of data mining e.g. neural networks, regression analysis, multivariate analysis, modern time series analysis and forecasting, decision trees, logistic regression, cluster analysis, rule associations etc. The strand will also generate text-monographs/journal papers that disseminate research results and associated best practice on STADAM. [5] The Pedagogy of Mathematical Modelling in FIEBB (PEMMA): This strand will research and innovate the curricula underpinning all the research strands listed in these notes. It will conduct action-based classroom and fundamental research on how to embed creative problem solving (CPS), critical thinking, problem-based learning, use of case studies, consulting and client-facing skills and entrepreneurship skills in learning, teaching and assessment (LTA) of quantitative courses in FIEBB. This strand will also generate text-monographs/journal papers that disseminate research results and associated best practice on PEMMA.

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[6] Research directions/workshops in Credit & Interest Rate Analytics: This will include: Design of more sophisticated credit and interest rate products suitable for special client risk management and investment challenges Understanding credit derivatives and structured products Mathematical models and case studies for/of pricing financial derivatives Strong real life exemplification of securitization markets, credit instruments, credit default options (CDOs) (including their rationale, origination and structuring), market approaches and models, rating agency approaches.

[7] Research directions/workshops in Extreme Value Theory (EVT) and Copula methods in quantitative finance: This will include Deep understanding of heavy-tailed risks and complex financial interdependencies as rationales for going beyond standard statistical models and simplifying assumptions of normality, in order to develop more sophisticated methodologies Overview of the role of EVT in modelling and measuring extreme risks Overview of the role of Copula functions in modelling co-movements between markets, risk factors and other variables studied in finance Detailed look at core topics in this body of techniques: theory of maxima; Fisher-Tippett Theorem; Maximum Domains of Attraction; Block Maxima Method for EVT; and Coping with Copulas; Types of Copulas; Fitting Copulas to Data; Application to Credit Risk (for Copula methods).

Patrick EZEPUE (BSc, MSc, PhD, PgCLTHE, PgCBA, FRSS) Visiting Professor of Stochastic Modelling in Finance & Business National Mathematical Centre (NMC), Abuja, Nigeria & Research Coordinator, Business Intelligence & Quantitative Modelling Research Group Cultural, Communications & Computing Research Institute (C3RI) Faculty of Arts, Computing, Engineering & Sciences (ACES) Sheffield Hallam University Sheffield S1 1WB, UK p.ezepue@shu.ac.uk

Reference

Ezepue P O & Adewale R T Solarin (2008) The Meta-Heuristics of Global Financial Risk Management in the Eyes of the Credit Squeeze: Any Lessons for Modelling Emerging Markets? Parts I, II & III, MNC-COMSATS International Conference on Mathematical Modelling of Some Global Challenging Problems, Abuja, Nigeria, 26-30 November 2008

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