On Nov. 24th, 2016, Robert F. Engle, Chair Professor at NYU Stern and 2003 Nobel Prize Laureate, visited Tsinghua PBC School of Finance, shared his recent research with the Faculty, and lectured at the 64th Tsinghua Forum - Tsinghua PBCSF Financiers Forum.
The Forum is organized by Tsinghua University Academic Committee, and Tsingua PBC School of Finance. ZHOU Hao, School’s Associate Dean and Unigroup Chair Professor, hosted the Forum. Over 200 financial scholars, researchers, faculty and students attended the Forum. Themed “Prospect for Global Financial Stability”, Professor Engle shared his recent research on Chinese stock market volatility, financial institutions’ systemic risk, and challenge and resolutions for global financial economy.
Professor Engle compared the data of China’s capital market, S&P 500, and HK stock market’s performances in the past decades. He concluded that one feature of the volatility is the stock market’s reaction to the information it contained. The more information disclosed the more volatile the market is. The chart proves the theory that, since the Chinese market is a young market, SPX is relative more stable during the past two decades, while SSE is more volatile than that of HIS during the 90s and the period between 2014 and 2016.
In analysis of the correlations of volatilities between the stock markets, while data shows that HK stock market is more related and synchronized with the US market than Hengseng Market, Chinese market is intentionally and relatively independent, and the relationship between China and the world become stronger through time. The research also shows that under the similar condition, Chinese investors would not pay more costs for lower risks.
Professor Engle then introduces the Volatility Laboratory (V-Lab), which provides real time measurement, modeling and forecasting of financial volatility, correlations and risk for a wide spectrum. He analyzed the volatility that caused by Brexit and American president election, and showed in detail how the international issues affected volatility in world’s capital market.
V-lab implemented the Domestic Systemic Risk (DRSK) system by Professor Engle to calculate the capital needed for the financial institutions to keep them self-efficient when facing the crisis. By calculating the DRISK of Chinese important financial institutions, he realized that banks and related financial institutions suffer less shock than stock companies and insurance companies. He also introduced how market supervisors can select and set risk target when they design and carry out the pressure test of financial institutions.
Professor Engle further concluded that low capital sufficient rate will make the whole financial system more vulnerable during the crisis. Forcing the process of deleverage will cause the discount of loans, which further causes the violation of the contract. The pressure test after the capital restructure is supposed to lead the target financial institute to a finer development track. The economic growth will strengthen the bank’s balance sheet, but the low growth rate is currently a global issue.
At last, Professor Engle shared his insights on the challenge of global economic finance. He believes that single monetary policy cannot solve the slowdown of global economy. Countries should make efforts to carry out restructure reform at the macro-economic level according to its monetary policies, e.g. increase investment in education, and public facility construction, but not by trade limit. China has made plausible progress through reforms, but also needs to pay attention to possible risks due to liabilities.
After the lecture, Professor Engle discussed with the audience and answered questions including the American election, financial institutions’ pressure test and risk index.
Tsinghua PBCSF Financiers Forum serves as a platform for promoting communication between acclaimed financiers and the general public. It brings together industry elite and academic stars to share with the audience their expertise and perspectives on domestic and international financial trends.