Robert F. Engle III

Who Is Robert F. Engle III?

Robert F. Engle III is an econometrician and professor of economics at New York University. Engle won the 2003 Nobel Prize in Economics, along with Clive W.J. Granger, for their analysis of time-series data with time-varying volatility.

Time-varying volatility is the fluctuation over time of the value of financial instruments, and Engle's discoveries of the variations in these instruments' volatility levels have become crucial tools for researchers and financial analysts. The model he developed is called autoregressive conditional heteroskedasticity (ARCH).

Understanding Robert F. Engle III

Robert F. Engle III was born in 1942 in New York and earned his Ph.D. in economics from Cornell University. He has taught at the Massachusetts Institute of Technology, the University of California at San Diego, and New York University.

Originally, Dr. Engle's academic pursuit was physics (along with his doctorate degree in economics, he also earned a master's degree in physics at Cornell), but his love for economics led him to a career of research and teaching in the field. He credits Ta Chung Liu, his former advisor at Cornell, for grounding him in econometrics as well as sparking an intellectual interest in analyzing relationships between different time scales for economic modeling. 

A fun fact about the man: Engle started ice skating as a hobby while in cold upstate New York and developed this passion to high skill levels, participating in numerous national adult skating competitions. He and his partners placed second in ice dancing in 1996 and 1999.

Major Contributions

Engle is best known for his development of ARCH, for which he was awarded the Nobel. He has also done considerable work in econometric modeling for urban economics. Together with Clive Granger, he helped to develop a time-series econometric modeling of and tests for cointegration between series. He later extended these econometric techniques to help found the field of financial econometrics.

Urban Economics

Engle's early work was in urban economics at MIT, where he was part of a team that developed an elaborate econometric model of the Boston region economy. He published several articles about applying econometric modeling to urban economics to support urban planning and redevelopment with objective statistical tools, which was a novel approach at the time. 

Engle developed ARCH to model time-varying volatility in inflation, prices, and wages to test a theory of Milton Friedman's, which is that economic cycles could be explained based on changes over time in people's uncertainty about inflation. In ARCH modeling, the variance of the error term is modeled as a function of its own past values; if tests of this model show a significant relationship between the variance and its past values, then this indicates that the data in question exhibit some time periods of elevated volatility and other periods of relative calm.

The Nobel Committee awarded the prize to Dr. Engle, stating that "his method (ARCH) could, in particular, clarify market developments where turbulent periods, with large fluctuations, are followed by calmer periods, with modest fluctuations." 

Cointegration

While at UCSD with colleague Clive Granger, Engle helped to develop modeling techniques and tests for cointegration. In cointegration, two or more time series show a relationship through time somewhat similar to the correlation between cross-sectional variables. Cointegration analysis is one tool that can be used to help distinguish between variables that have a spurious correlation and those that have a plausible causal relationship.

Financial Econometrics  

Engle and others would go on to extend these time-series econometric techniques, along with others, to help found a new approach to financial forecasts, planning, and risk management, which became known as financial econometrics and quantitative finance. He was co-founder, along with Eric Ghysels, of the Society for Financial Econometrics.

Tools such as the capital asset pricing model, the value at risk model, and modern portfolio theory all fall under this general area. Much of modern quantitative finance owes its origins to the tools that Engle and other financial econometricians have developed.