On the estimation of the volatility-growth link
(2012) , 8 pages
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- Authors
- 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.
- Affiliations
University of Mainz, CESifo and UCL Louvain-la-Neuve Mainz School of Management and Economics and IRES Aarhus University and CREATES, CESifo School of Economics and Management University of Mainz, CESifo, UCL Louvain la Neuve and University of Bristol School of Economics and Management,IRES and Center for Structural Estimation
Citations
Launov, A., Posch, O., & Wälde, K. (2012). On the estimation of the volatility-growth link (IRES Discussion papers 2012009). https://hdl.handle.net/2078.5/36051