An important step along the way was the establishment of Australia’s first Financial Econometrics research group in 2011, which became a strategic research centre, the Centre for Economics and Financial Econometrics Research (CEFER), in 2014.
Financial econometrics, combines the disciplines of finance and econometrics to provide more accurate forecasting and risk management and analysis models.
Professor Narayan says the distinguishing feature of his centre’s work, compared to other economic and finance research faculties or schools, is that they develop an econometric model to explain, for example, how a financial market or a sector of the economy might behave, and then show how an investor can use that model to devise trading strategies.
This is in contrast to what often occurs, where academics at one university will describe a theoretical model and – maybe – other researchers from around the world will take that model and see how it might apply to real market data.
‘The downside of that approach,’ says Prof Narayan, ‘is that it takes some time for a model to be proved or modified through practical research – sometimes many years.’
Great research into poor governance
One recent paper from Deakin’s CEFER, for instance, looked at the role of governance – for instance, legal regulations and the institutions that enforce laws, stock market listing rules, code of conduct guidelines and best practices, and business ethics – in forecasting stock returns, using data from 38 countries.
‘Typically, from an investor’s point of view they will track financial ratios – changes in book-to-market ratios, dividend ratios, price earnings ratios and cash flows,’ says Narayan.
‘What we are saying is there can be more information in variables other than historic pricing and published financial data, such as governance systems within countries.’
Narayan’s team proved that potential returns from riskier countries are higher than from countries that are relatively more stable in terms of their credit rating. This flowed through to other non-financial measures – but was most marked for poor country-level governance.
‘What we found was very pleasing from an investor point of view in that governance has a strong influence on potential stock returns, such that if the investors were to track governance factors alone then they could use that information to forecast stock returns,’ says Narayan.
World standard recognition
Its publication of original cross-discipline research with practical application for investors and policymakers that contributed directly to the Deakin Department of Finance’s rise to ‘world standard’ in the 2015 Excellence in Research Australia (ERA) ratings.
It has no doubt seen Narayan himself widely recognised as an international leader in the field of finance and econometrics. Recent honours include a 2015 Mahatma Gandhi Pravasi Samman award, which acknowledges people of Indian origin living in other countries, who have made a substantial contribution to their discipline over a period of time and have contributed to international philanthropic endeavours and community projects.
And in early 2016, Narayan received the Mahalanobis Memorial Medal, presented by the Indian Econometric Society every four years to a person under the age of 45 who has made outstanding contributions to quantitative economics.
However, he is keen to stress that the ERA ‘world standard’ rating for his school, based on a review of published research every five years, is more important to him.
‘The significance of this is that it is for a collective effort, not just for me. The four staff members here have put in an extraordinary amount of work, which needs acknowledgement. I have some very bright researchers who work with me – they are some of the best that one could get,’ he says.
‘To get recognition as publishing world standard finance research is our biggest contribution to the standing of Deakin Business School.’
Taking charge with Islamic finance
Narayan is looking to further align the work at CEFER with the needs of the financial sector and its policymakers. ‘This year is going to be one of those rewarding years for us in terms of building further industry connections,’ he says.
For instance, Deakin Business School has built itself a reputation for excellence in the emerging sector of Islamic finance.
‘We have a database of Islamic stocks – the only one in the world, and it was created by a research fellow at Deakin,’ says Prof Narayan. ‘This has helped us further in being seen as leaders in analysing data.’
‘The Islamic financial institutions want to connect with my centre to see how they can use the models we have developed to come up with trading strategies. This is an opportunity for us to work collaboratively with them, and take a leadership role in this area.’
In 2015, Prof Narayan was invited to give a keynote address to several G20 meetings on the topic of Islamic finance. He will be back speaking at the Central Bank of Turkey on the same topic in April 2016.