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On the estimation of the volatility-growth link

Klaus Wälde (), Andrey Launov and Olaf Posch ()

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

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 ndings 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 re- stored. In short, we suggest that the variance equation must include relevant control variables to estimate the volatility-growth link.

JEL-codes: E32 O41 O47 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-gro and nep-mac
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Related works:
Working Paper: On the Estimation of the Volatility-Growth Link (2014) Downloads
Working Paper: On the estimation of the volatility-growth link (2012) Downloads
Working Paper: On the estimation of the volatility-growth link (2012) Downloads
Working Paper: On the estimation of the volatility-growth link (2012) Downloads
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