On the Estimation of the Volatility-Growth Link

CREATES Research Paper 2012-21

12 Pages Posted: 8 Oct 2014 Last revised: 23 Sep 2019

See all articles by Andrey Launov

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: September 20, 2019


It is common practice to estimate the volatility-growth link by specifying a growth equation such that the variance of the error term appears as an explanatory variable. Hardly any of existing applications of this framework includes exogenous controls in the variance equation. We show that the absence of relevant explanatory variables in the variance equation is not innocuous, leading to an omitted variable problem with an biased and inconsistent estimate of the volatility-growth link. Our simulations suggest that this effect is large and should be addressed in the empirical work. Once the appropriate controls are included consistency is restored.

Keywords: Volatility and growth; Volatility-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 (September 20, 2019). 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

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

Olaf Posch (Contact Author)

Universität Hamburg, Department of Economics ( email )

Von-Melle-Park 5
Hamburg, 20146


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

Klaus Wälde

University of Mainz ( email )

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

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

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

UCL at Louvain la Neuve

Place Montesquieu, 3
Louvain-la-Neuve, 1348

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