From Phoenicia to finance

March 8, 2021

Growing up in a country with a history more ancient than any other, but one that was also ravaged by sectarian violence and civil war, Dr Arzé Karam had her eyes set on leaving Lebanon for France from a young age. With dreams of becoming a professional ballet dancer dashed, studying for a career in finance became the path to a new beginning, a new life. Now a professor at Durham University, Arzé’s academic career has seen her study under the tutelage of Nobel Prize-winning economists at the University of Toulouse, complete a PhD at the University of Paris and teach at the elite Sorbonne and Dauphine institutions. The Lebanese/British scholar puts her glimmering success down to a strong sense of survival and a passion for finance, something she’s keen to pass on to the next generation at Durham. Richard Dawson speaks to Arzé about her remarkable journey and asks what research can tell us about the extreme events that have defined financial markets in recent times.

Little is known about the ancient Phoenician civilisation that dominated trade and commerce throughout the Mediterranean in the first millennium BC.

Part of that is because it was such a long time ago and, unlike other cradles of civilisation such as Egypt, Greece and Mesopotamia, there are few surviving indigenous records written about them.

What we do know is that they developed an expansive maritime trade network that some historians argue laid the economic, political and cultural foundations of Western civilisation as we know it today.

As well as being the dominant commercial power for much of classical antiquity, the Phoenicians are best known for creating the world’s oldest verified alphabet.

They operated out of three major cities in modern day Lebanon – Tyre, Sidon and Byblos – two of which are still inhabited today, making them among the oldest cities in the world.

Byblos is also home to the world’s oldest port, which was used by the Phoenicians for thousands of years to ship local wine, timber and cedar to other ancient lands.

The Phoenician heritage continues to influence Lebanese identity today, as does the Francophone culture and language. Lebanon was brought under the French Mandate following the collapse of the Ottoman Empire after the First World War and the language remains the second most spoken after Arabic.

Dr Arzé Karam, assistant professor in finance at Durham University, is in many ways a product of her home country’s rich and ancient history.

Born in the port city of Byblos, Arzé grew up dreaming of becoming a professional ballet dancer.

“I started to dance at the age of five and it was something that I loved to do,” she says.

An opportunity presented itself to go to France to pursue her dancing dreams, but the ongoing civil war made leaving impossible for the youngster.

Family also didn’t want her to leave in such dangerous circumstances.

As part of the Maronite Christian faith that is still a major demographic in the multi-sectarian state of Lebanon today, Arzé and her family had to live through the horrors of a civil war fought on religious lines from 1975 to 1990.

She explains: “I am a child of the Lebanese Civil War.

“We were in hiding most of the time together with family and neighbours in the underground and we would hear the bombing going on for days and nights.

“There is a trauma, and it will always exist, but it’s not something that can destroy you as a person, it actually gives you this sense of survival.”

Her ballet plans firmly adjourned because of the conflict, Arzé remained determined to leave Lebanon and made clear to her parents that after living through such a difficult time, she wanted to see something else.

Her education provided the way out.

“Coming from a catholic family, all of my education at school was French-based,” she says.

“This gave me the aspiration to live in France, even when I was very young.

“I jumped at the first opportunity to move there for my higher education studies.”

Arriving at the University of Toulouse, Arzé was almost immediately inspired to pursue a career in finance after meeting her professors, who included Nobel Prize-winning economist Jean Tirole.

Finance was also the chosen path for many of the one million people who left Lebanon during and after the civil war, something which Arzé puts down to their Phoenician heritage.

It was not an easy path to take, particularly given the fact that Toulouse was one of the top universities in the world for finance, economic theory and industrial organisation, subjects Arzé now teaches at Durham University.

She recalls: “I remember my first year of study and from the beginning, the professors told us, ‘forget about your social life, you have to work hard’.”

Of course, Arzé had been through more hardship than most of her classmates and embraced the rigours of economic theory and finance with open arms.

After completing her degree and masters with distinction at Toulouse, the aspiring professor studied for a PhD at the University of Paris, splitting her time between her research and teaching undergraduates at Paris Sorbonne and Paris Dauphine – two of the most elite academic institutions in Europe.

“Paris was beautiful,” she says, “but it also gave me access to many more universities, seminars and opportunities.

“When I used to teach at Sorbonne, I would go to mark assignments in the Jardin du Luxembourg – it was terrific.”

Graduating summa cum laude (with top marks) in her PhD, teaching at the Sorbonne and living in what is probably the most beautiful city in the world, you could be forgiven for thinking this is where our Phoenician descendant’s story ends.

But Arzé had never been one to rest on her laurels and still wanted to improve her English so that she could make a bigger impact with her research in finance – a resolutely anglicised profession.

After a two-year post-doctoral research project in market microstructure at Queen’s University Belfast, Arzé found herself moving to the North East to become a lecturer in finance.

Now assistant professor at Durham University Business School, she has spent the last eight years inspiring the next generation and developing her research into the mechanics of capital markets, focusing on extreme events, flash crashes, high frequency trading and systemic risks.

It was at a conference in New York last March, headed up by another Lebanese finance expert and essayist Nassim Taleb, that Arzé first heard about the most extreme event in modern market history – the Coronavirus Crash.

“When the first market crash hit last March, I think we had a Black Monday and then a Black Thursday and another Black Monday,” she says.

“I was in New York for a workshop and on the last day we were talking about the need for new models and tools to assess systemic risks and then the S&P500 started to crash.

“In some ways, I was expecting this to happen because when you know the market, you just know that it is not really how we think – it always misbehaves.

“There are always a lot of risks that are hidden and once a financial shock happens, the market will crack down because it’s reflecting what’s going on.

“The event we saw last March was probably not anticipated but we could still see this coming.”

Arzé’s research into flash crashes made her less terrified than the rest of us when major stock markets went into freefall this time last year.

A flash crash is an extreme – but short lived – intraday market movement that usually only lasts an hour or two.

On May 6, 2010, for example, there was a massive flash crash that saw the Dow Jones Industrial Average collapse by 998.5 points (nine per cent) in a matter of minutes, only to rapidly rebound and make back most of the losses in the same day.

Arzé has been investing a lot of time into better understanding these extreme events because many of the existing models we use to measure risk do not function properly during them.

She explains: “If you look at the data when an earthquake happens, you have a lot of warning signals.

“But deep down, there are no tools that can tell you that the market is suffering and is going to collapse. Prices can move for any reason, so we need more tools reflecting the reality.”

Another area of Arzé’s research is around high frequency trading, something which has been dramatically expanded thanks to digital platforms like Robinhood and Trading212, which were at the centre of the recent GameStop share frenzy.

It was the first time that ordinary retail investors had shown themselves to be capable of moving prices in a big way, but for Arzé, it was just another day on the markets.

“From my perspective, I see this as normal behaviour,” she contends.

“People are following the same strategy, but the people are different now.

“The strategy is, if I see strength in the market, I might take a position.

“I also think, from what we have seen, the retail investors knew what they were doing.

“To squeeze big hedge funds like this, it doesn’t come from people who don’t know what they’re doing.

“I think, from the hedge fund’s point of view, they’ll be taking retail influence into account now.”

Predicting the future is always a fool’s game, but for financial analysts and economists, it’s also part of their job.

Arzé likes to tackle questions about the future economic outlook by always preparing for the worst and working back from there. She thinks the major downside risk to the economic recovery moving forward is the extent to which the health crisis is masking the economic crisis.

As individuals, businesses and governments each take on more and more debt to get through crippling national lockdowns, the prospect of a solvency crisis is very much on the cards.

Arzé explains: “COVID-19 is still ongoing. We don’t know how many firms will go bankrupt and default on their loans. We have no specific figure on that.

“We might end up in a situation where, in addition to what is going on with the increasing frequency of crashes, which come from a lack of liquidity, we may also have a solvency crisis.

“We can’t afford not to think about the worst case scenario.”

In the middle of a global pandemic, which everyone thought would never have spread out from the Hubei province of China, those are words to live by.

Dr Arzé Karam

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