Nobel Laureate Tackles the Cliff

Photograph by Andrew Harrer/Bloomberg

Robert Engle

Robert Engle knows all about risk.

He runs the “V Lab.”

The Nobel Prize winner in economics (2003) and director of the Volatility Institute at the Stern School of Business at New York University foresees little volatility in the stock market.

(Unless lawmakers go over the so-called fiscal cliff — see Jeff Kearns’ report on that prognosis.)

Engle predicts either a solution of some sort to the current fiscal debate in Washington by year’s end or possibly an agreement precipitated by the breaking of the Jan. 1 deadline and notes the markets aren’t worried about that.

“We’ve pretty much had a decline in volatility” since mid-August, Engle said at a luncheon with editors and reporters in Bloomberg’s Washington Bureau today. That followed the upsets of the U.S. attempting to deal with its debt ceiling and European sovereign debt crises last summer. His forecast for volatility ahead is 12 percent — “very low compared to historical levels.”

Engle won the Nobel for development of the Autoregressive Conditional Heteroskedasticity (ARCH) model for a theory of dynamic volatility — invented while on sabbatical at the London School of Economics in 1979 (and what did you do with your summer break?).

“The advantage of knowing about risks is that we can change our behavior to avoid them,” Engle said in his Nobel Lecture nearly nine years ago, on Dec. 8, 2003. “Optimal behavior takes risks that are worthwhile.”

Words of advice for Capitol Hill.


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