In 1969, at the age of 27, Robert Engle received his Ph.D. in economics from Cornell University, and he was a protégé of the famous Chinese economist Liu Dazhong.
More than half a century later, Engel, who was already in his old age, won the "Magnolia Memorial Award". In December 2023, the 2023 Shanghai Magnolia Award Ceremony was held in Shanghai, and 50 outstanding expatriates from 15 countries, including Armenia, Australia, Brazil, Canada, France, Germany, Italy, Japan, South Korea, the Netherlands, Romania, Singapore, Sweden, the United Kingdom, and the United States, were honored with this honor. Engel, winner of the 2003 Nobel Prize in Economics and co-director of the Institute for Financial Volatility (VINS) at NYU Shanghai, is one of them, and his ARCH model (Autoregressive Conditional Heteroskedasticity Model) and other achievements have helped China establish the Institute of Financial Volatility, which has made outstanding contributions to China's economic construction, social development and foreign exchanges.
With his trademark white hair and amiable smile, this economist left a deep impression on reporters in an exclusive interview with the 21st Century Business Herald, and you can always quickly "locate" him in the crowd. Robert Engel is a well-known econometric economist who has created the ARCH model and has made cross-disciplinary contributions in the fields of economics, finance, and statistics.
In 2003, Engel was awarded the Nobel Prize in Economic Sciences by the Royal Swedish Academy of Sciences for his pioneering work. According to the Royal Swedish Academy of Sciences, his ARCH model has become an indispensable tool for the economic community to conduct research and for financial market analysts to assess prices and risks.
However, the Nobel Prize in Economics is not Engel's "end", and the story of this "halfway monk" economist continues, constantly "adding bricks and tiles" to the ever-changing edifice of economics.
Robert Engel. Data map
Physics provides the scientific "formula" for economic research
Interestingly, Engel, a master of econometrics, did not come from an economics degree, but aspired to become a physicist in college.
In 1964, Engel graduated from Williams College with a degree in physics. Before grad school, he applied to Cornell University and the University of California, Berkeley, respectively, to major in physics, but Berkeley's graduate school did not receive Engel's call in time, missing out on this "potential stock", and finally Engel entered Cornell University to engage in superconductor research.
Life is a long road, but there are only a handful of critical choices. An important turning point in Engel's youth came in 1966, when he took an economics course and unexpectedly discovered that his true "love" was actually economics. He hoped to go to the Department of Economics of Cornell University to conduct economic research after completing his master's degree, and then Engel found the dean of the Department of Economics of Cornell University, fortunately there was a place at that time, and Engel officially transferred to the Department of Economics of Cornell University to study for a doctorate, and his supervisor was the well-known Chinese economist Liu Dazhong.
Turning to economics, Engel discovered that it was not necessary to learn to calculate to become an economist. Physics provides a scientific "formula" for economic research, and he told reporters that physics research requires a series of scientific processes: hypothesis, measurement, testing...... Eventually, a consensus is reached on how the world should work.
"I became an economist because I wanted to study how the world works with the most quantitative social sciences, and physics provides a scientific formula for economic research. Even though Engel later became a Nobel laureate in economics rather than a physics laureate, he admits that physics initially cultivated the mindset that was essential for his research.
It is essential to "quantify" risk
By the time he graduated with his Ph.D. in 1969, Engel had already laid a solid foundation in econometrics that would create the foundation for the subsequent ARCH model.
Random volatility in financial markets is common, as is the case in markets such as stocks, bonds, and foreign exchange, and volatility can change over time. Market volatility also tends to be cyclical, for example, after a period of relative calm, there may be a special period of sharp volatility, and economists have always wanted to devise a set of statistical models to discover the pattern of volatility changes and predict the future.
Engel's ARCH model is a major breakthrough in the field of econometrics. In 1982, Engel proposed the ARCH model in his paper "Autoregressive Conditional Heteroskedasticity and Estimation of the Variance of British Inflation" published in Econometrics, which ended the "primitive era" of the study of the volatility of financial variables, and the ARCH model family has subsequently become a magic weapon in the toolbox of financial theorists and practitioners. Engel told reporters that ARCH is a statistical model for predicting risk in financial markets, and for many financial tasks, a "quantitative" measure of risk is crucial.
At the same time, the ARCH model is constantly adding new vitality to the times. In 1986, Engel's student Boraslev extended the ARCH model to propose the Generalized Autoregressive Conditional Heteroskedasticity Model (GARCH). In 1990, Bolaslev extended the univariate GARCH model to the multivariate GARCH model.
These models have a wide range of applications in practice. Engel told reporters that ARCH and GARCH can be used to price derivatives, estimate the correlation of time changes, measure risk in factor investments, such as climate risk, make market-based estimates of capital shortages in the financial sector in the face of market and climate risks, and model the risk of almost any financial asset or portfolio.
In 1995, Engel and Kroner proposed the BEKK GARCH model, which solved the problem of the constant conditional correlation coefficient as a factual problem. Although the BEKK GARCH model is a popular multivariate volatility model, it also has inherent defects, and there are too many coefficients that need to be estimated, which grow too fast as the model dimension increases. Therefore, in 2002, Engel proposed the dynamic conditional correlation coefficient model (DCC model), which abandoned the assumption of the constant conditional correlation coefficient and replaced it with a dynamic equation, which was widely praised and widely used in practice.
A financial crisis in the United States is unlikely
In the face of stubborn inflation not seen in decades, the Federal Reserve has made an aggressive interest rate hike rarely seen in history, and a 75 basis point rate hike has become "commonplace".
Under the knock-on shock of a sharp tightening of liquidity, the collapse of Silicon Valley Bank in March 2023 shocked the global market, kicked off the prelude to the regional banking crisis in the United States, and became the "last straw" that crushed Credit Suisse on the other side of the ocean. In addition, it is important to be wary that the US commercial real estate industry is also at risk of the biggest collapse since 2008, with about $1.5 trillion in debt due in the coming years.
ENGEL has long been deeply involved in the fields of financial volatility and systemic risk. In 2009, Engel founded the Volatility Institute at NYU's Stern School of Business, of which VLAB (Volatility Lab) is an important part of the institute and SRISK (Systemic Risk) is a major focus of VLAB. ENGEL uses the ARCH model to measure, model and predict the volatility, correlation and other risk dimensions of various financial assets in real time, and analyze systemic risk.
Engel explained to reporters that VLAB has a measurement method that uses market value to measure the systemic risk of banks, and the risk indicator SRISK on VLAB predicts this small bank crisis. In his opinion, the pressure on the remaining regional banks in the United States has somewhat eased, but the SRISK indicator has not yet returned to normal, and risks to the US banking sector remain. U.S. interest rates remain elevated, making it difficult to return to the era of near zero interest rates, and some regional banks' bond portfolios are still in the red.
Given the lagged effect of the Fed's aggressive rate hikes, is there a systemic risk in the United States, and will another financial crisis occur in the future?
In this regard, Engel told reporters that the current risk is only in small and medium-sized banks, so it will not trigger another financial crisis. There are always risks ahead, but he doesn't think there's a big risk of a financial crisis in the United States. The Fed will cut interest rates in 2024, which will reduce financial and economic risks.
Back in the 70s of the 20th century, the US inflation rate was once as high as double digits, and in order to curb hyperinflation, the then Federal Reserve Chairman Volcker raised interest rates to an unprecedented 20%, and finally curbed inflation, but at the cost of US GDP growth from 5.5% in 1978 to -1.8% in 1982.
The situation seems to be different today, the US economy is expected to have a soft landing in 2024, but the risk of recession has not been completely ruled out, does the Fed need to continue the "Volcker model" to fight inflation? Engel believes that historical experience can be used as a reference, but the Fed cannot completely copy it, and the effect of raising interest rates today is not as great as most economists expect. Today, unlike in the past, the global situation has changed.
There is a "good prescription" for the high-quality development of China's economy
Since the 60s of the 20th century, when he studied under the master of Chinese economics Liu Dazhong, Engel and China have formed an indissoluble bond.
Engel not only founded the Fluctuation Institute at NYU's Stern School of Business, but also made great contributions to the development of the Institute of Fluctuation in China. FOR EXAMPLE, THE VOLATILITY INSTITUTE AT NYU STERN'S SCHOOL OF BUSINESS AND THE INSTITUTE FOR FINANCIAL VOLATILITY AT NYU SHANGHAI WORK CLOSELY TOGETHER TO ANALYZE DAILY VOLATILITY AND SYSTEMIC RISK IN CHINA'S FINANCIAL MARKETS.
BASED ON THE STERN BUSINESS SCHOOL'S VLAB, VINSIGHT HAS BEEN ADAPTED FOR THE CHINESE MARKET, INCORPORATING CLASSICAL THEORIES SUCH AS ENGEL'S ARCH MODEL WITH THE LATEST DEVELOPMENTS IN THE FIELD OF FINANCIAL ECONOMETRICS. THE VINSIGHT PLATFORM FOCUSES ON THE ANALYSIS OF CHINA'S FINANCIAL MARKETS, PROVIDING DAILY VOLATILITY DATA AND ANALYSIS OF MAJOR STOCK INDICES AND STOCKS IN DIFFERENT REGIONS, INDUSTRIES AND TYPES OF STOCKS FOR ACADEMIA, INDUSTRY AND GOVERNMENT POLICYMAKERS.
As the founder of the Volatility Institute at NYU's Stern School of Business and co-director of the Institute for Financial Volatility at NYU Shanghai, Engel has promoted empirical research on Chinese and global financial markets, promoted collaboration between academia and the financial industry in the field of research, and contributed to the development of the financial industry and markets by providing timely financial market information and analysis to academia, financial industry, and regulatory and policy-making departments through a platform of financial econometric technology innovation.
In Engel's view, it is crucial to focus on systemic risks, and all countries need to be proactive, and regulators need to do more to prevent and act when small problems are detected. For China, it is also crucial to monitor volatility and guard against systemic risks.
On the one hand, China is currently facing a number of challenges. Engel said that China's banking sector has been undercapitalized for many years, and in the context of the impact on the real estate sector and some impact on local governments, it is necessary to be wary that the banking sector may not be able to take on the additional debt needed to avoid a recession.
On the other hand, the overall performance of China's economy in 2023 is remarkable. According to the National Bureau of Statistics, gross domestic product (GDP) in the first three quarters of 2023 was 913027 billion yuan, a year-on-year increase of 5.2% at constant prices. In terms of quarters, GDP grew by 4.5% year-on-year in the first quarter, 6.3% in the second quarter and 4.9% in the third quarter.
Looking to the future, how to promote the high-quality development of China's economy? Engel told the 21st Century Business Herald reporter that China can use more foreign investment and exports to boost the economy, promote the easing of international tensions, introduce some stimulus policies, and adopt a more supportive attitude towards the private sector, especially the science and technology sector, which may become an important driving force for China's economic growth.
As we move forward, Engel is still unleashing positive energy for the development of economics and global cooperation, and there is no end to the road ahead.
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