The Wolfson Centre for Young People's Mental Health, to be based at Cardiff University, will study how problems such as anxiety and depression arise in young people, and aims to develop more effective interventions.
Experts will analyse findings to help inform and develop public health and school policies and schools will also be examined for the role they play in promoting positive mental health.
The centre will see experts in child and adolescent psychiatry, genetics, social science and public health working together on topics such as how genetic and environmental factors are involved.
Interventions may include how to support families when a parent suffers from depression.
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Research charity The Wolfston Foundation, which has funded the venture, said the centre's access to Wales' health, social care and educational record data would be "unparallelled".
Paul Ramsbottom, chief executive of the Wolfson Foundation, which awards grants to educational, scientific and health projects, said there was still much to understand about the causes, prevention and treatment of mental health.
"By launching this initiative and making this award, we want to make a statement about the importance of young people's mental health - and of supporting high quality research into the subject," he said.
Ramsbottom said the centre would forge links with schools and health services across Wales encompassing the experiences of young people to inform the research.
This would be based on a dataset that gave Wales a "distinct advantage" in research in this area, he added.
Cardiff University's Professor Frances Rice, who will co-direct the new centre with Professor Stephan Collishaw, said 75 per cent of young people with an anxiety disorder or depression received no intervention.
"The impact on the young person, their families and their life chances can be devastating," said Rice.
Collishaw said Wales was a "living lab" of around 1.3m young people.
"This major investment will allow us not only to understand the causes of anxiety and depression but help create early interventions to ensure that young people get the right help, advice and support they need."
In addition to academic leads for each area of research, the centre will appoint 10 postdoctoral fellows as well as a number of PhD students.
The centre plans to hold an annual adolescent mental health summer school to provide training in adolescent mental health research to fellows, students and practitioners at the early stages of their professional training.