Measure of chance

Robert Engle, a Nobel laureate, makes a speech at an economic forum in Nankai University in Tianjin in October 2016. [Photo provided to China Daily]

Nobel-winning economist Robert Engle suggests improvement in capital allocation for fast-growing SMEs in China, Liu Xiangrui reports.

American economist Robert Engle gave Chinese officials some ideas on how to make China's financial sector more efficient.

Engle, winner of the 2003 Nobel Prize in economics along with British economist Clive Granger, was invited to Beijing last week by the State Administration of Foreign Experts Affairs to give his suggestions on risk management in China's capital market, because of his expertise in studying volatility.

Financial institutions should be subjected to regular stress tests to see if they remain solvent enough in the face of an economic downturn. The results of such tests should be published publicly and become benchmarks for performance of banks as well so that they do a more effective job of choosing where the loans go, he says.

"I think that many more benefits will come from improving allocation of capital to the fast-growing SMEs, which are also job creators," says Engle, 75.

He and Granger are recognized for developing a path-breaking statistical model called the autoregressive conditional heteroskedasticity that is designed to analyze unpredictable movements in market prices and interest rates. The method can also measure systematic risks in financial markets, especially on a short-term basis.

"If you try to predict a year in the future, it's very complicated. If it's a day in the future, that's not so hard," he explains. "If we talk about risk management for financial applications, maybe short-horizon predictions are enough."

Engle earned a master's degree in physics before he went on to acquire a PhD in economics from Cornell University in 1969.