Professor Lasse Heje Pedersen, CBS, writes about the laureate:
Robert Engle is a distinguished professor of finance at New York University Stern School of Business. He was awarded the 2003 Nobel Prize in Economics for developing “methods of analyzing economic time series with time-varying volatility,” that is, showing how turbulent periods with large price fluctuations predict future turbulent periods and eventual reversion to normality. Simply put, he is an expert on risk. His research sparked the development of a large class of highly influential econometric techniques that have proven useful for many real-world problems.
How Much SRISK is Too Much?"
When financial firms are undercapitalized, they are vulnerable to external shocks. This is commonly measured by stress tests or market based measures such as SRISK (systemic risk). More importantly, the natural response to this risk is to raise capital and this can endogenously start a financial crisis. Excessive credit growth can be interpreted as undercapitalization of the financial sector. Hence we can ask how much SRISK can an economy stand and what is the probability of a crisis. Using a crisis intensity variable constructed by the Romers, a Tobit model is estimated for 23 developed economies. The probability of crisis and an SRISK capacity measure can be computed from these estimates. These are plotted for several countries.