On the Estimation of the Volatility-Growth Link

CREATES Research Paper 2012-21

13 Pages Posted: 8 Oct 2014  

Andrey Launov

University of Wuerzburg; IZA Institute of Labor Economics

Olaf Posch

Universität Hamburg, Department of Economics; CREATES

Klaus Wälde

University of Mainz; CESifo (Center for Economic Studies and Ifo Institute); UCL at Louvain la Neuve

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2014

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 modeled 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

JEL Classification: E32, O47

Suggested Citation

Launov, Andrey and Posch, Olaf and Wälde, Klaus, On the Estimation of the Volatility-Growth Link (October 1, 2014). CREATES Research Paper 2012-21. Available at SSRN: https://ssrn.com/abstract=2084152 or http://dx.doi.org/10.2139/ssrn.2084152

Andrey Launov

University of Wuerzburg ( email )

Sanderring 2
Würzburg, D-97070
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Olaf Posch (Contact Author)

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Klaus Wälde

University of Mainz ( email )

Mainz School of Management and Economics
Mainz, 55128
Germany
+49 6131 3920143 (Phone)

HOME PAGE: http://www.waelde.com

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

UCL at Louvain la Neuve

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

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