On the Estimation of the Volatility-Growth Link

Andrey Launov, Olaf Posch and Klaus Wälde

No 5018, CESifo Working Paper Series from CESifo

Abstract: It is common practice to estimate the volatility-growth link by specifying a standard growth equation such that the variance of the error term appears as an explanatory variable in this growth equation. The variance in turn is modelled by a second equation. Hardly any of existing applications of this framework includes exogenous controls in this second variance equation. Our theoretical findings suggest that the absence of relevant explanatory variables in the variance equation leads to a biased and inconsistent estimate of the volatility-growth link. Our simulations show that this effect is large. Once the appropriate controls are included in the variance equation consistency is restored. In short, we suggest that the variance equation must include relevant control variables to estimate the volatility-growth link.

Keywords: volatility and growth; growth regression; endogenous variance; unbiased estimates (search for similar items in EconPapers)
JEL-codes: E32 O47 (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: On the estimation of the volatility-growth link (2013)
Working Paper: On the estimation of the volatility-growth link (2012)
Working Paper: On the estimation of the volatility-growth link (2012)
Working Paper: On the estimation of the volatility-growth link (2012)
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