Institutions and growth volatility

Recently some studies provided evidence that democratic political institutions generate less volatile growth. These studies, however, do not provide any link between democracy and investment volatility. Here, we focus on the specific channel that links individualistic societies and low growth volatility. We test whether investment volatility and consequently growth volatility are lower in individualistic societies. We construct a two-equation system of investment and income growth volatility, allowing various measures of individualism to influence growth volatility both directly and indirectly. We find that individualism significantly directly and indirectly influences growth volatility negatively.

Financial development, shocks, and growth volatility

This paper uses spectral theory to develop the following two testable hypotheses in a unified framework for the predictions of business-cycle and endogenous growth models: (i) financial development affects only business-cycle volatility; and (ii) shocks affect both business-cycle volatility and long-run volatility of GDP growth. In other words, volatility caused by shocks is more persistent than that caused by financial underdevelopment. We decompose the business-cycle and long-run volatility by the spectral method and then test the hypotheses at the cross-country level. Empirical evidence provides support for both hypotheses. Higher private credit, a bank-based measure of financial development, dampens business-cycle volatility but not long-run volatility. Volatility of shocks, as measured by the volatility of changes in the terms of trade, magnifies both business-cycle and long-run volatility. The results are robust to accounting for endogeneity, a market-based measure of financial development, and an alternative method of volatility decomposition.

Cross-Country Evidence on Output Growth Volatility: Nonstationary Variance and GARCH Models

This paper revisits the issue of conditional volatility in real GDP growth rates for Canada, Japan, the United Kingdom, and the United States. Previous studies find high persistence in the volatility. This paper shows that this finding largely reflects a nonstationary variance. Output growth in the four countries became noticeably less volatile over the past few decades. In this paper, we employ the modified ICSS algorithm to detect structural change in the unconditional variance of output growth. One structural break exists in each of the four countries. We then use generalized autoregressive conditional heteroskedasticity (GARCH) specifications modeling output growth and its volatility with and without the break in volatility. The evidence shows that the time-varying variance falls sharply in Canada, Japan, and the U.K. and disappears in the U.S., excess kurtosis vanishes in Canada, Japan, and the U.S. and drops substantially in the U.K., once we incorporate the break in the variance equation of output for the four countries. That is, the integrated GARCH (IGARCH) effect proves spurious and the GARCH model demonstrates misspecification, if researchers neglect a nonstationary unconditional variance.

Future Earnings Growth Volatility and the Value Premium

The value premium is well established in empirical asset pricing, but to date there is little understanding as to its fundamental drivers. We use a stochastic earnings valuation model to establish a direct link between the volatility of future earnings growth and firm value. We illustrate that risky earnings growth affects growth and value firms differently. We provide empirical evidence that the volatility of future earnings growth is a significant determinant of the value premium. Using data on individual firms and characteristic-sorted test portfolios, we also find that earnings growth volatility is significant in explaining the cross-sectional variation of stock returns. Our findings imply that the value premium is the rational consequence of accounting for risky earnings growth in the firm valuation process.

Measuring the response of macroeconomic uncertainty to shocks

Recent research documents the importance of uncertainty in determining macroeconomic outcomes, but little is known about the transmission of uncertainty across such outcomes. This paper examines the response of uncertainty about inflation and output growth to shocks documenting statistically significant size and sign bias and spillover effects. Uncertainty about inflation is a determinant of output uncertainty, whereas higher growth volatility tends to raise inflation volatility. Both inflation and growth volatility respond asymmetrically to positive and negative shocks. Negative growth and inflation shocks lead to higher and more persistent uncertainty than shocks of equal magnitude but opposite sign.

The oil stock fluctuations in the United States

The goal of this paper is to examine whether the volatility of the growth in the US oil stocks has changed overtime, and if it has then whether or not this change is real. We find that the growth in volatility of oil stocks has declined overtime. We conduct a Monte Carlo simulation exercise to investigate whether this decline is real or an artefact of the growth definition. Our findings support the fact that the decline in growth volatility of oil stocks is an artefact of the growth definition. This is because a data generating process having a unit root with drift has a tendency to grow and thereby pulls the variance of growth down with time.

On measurements of formation, growth, hygroscopicity, and volatility of atmospheric ultrafine particles

Atmospheric aerosol particles affect the global climate as well as human health. In this thesis, formation of nanometer sized atmospheric aerosol particles and their subsequent growth was observed to occur all around the world. Typical formation rate of 3 nm particles at varied from 0.01 to 10 cm-3s-1. One order of magnitude higher formation rates were detected in urban environment. Highest formation rates up to 105 cm-3s-1 were detected in coastal areas and in industrial pollution plumes. Subsequent growth rates varied from 0.01 to 20 nm h-1. Smallest growth rates were observed in polar areas and the largest in the polluted urban environment. This was probably due to competition between growth by condensation and loss by coagulation. Observed growth rates were used in the calculation of a proxy condensable vapour concentration and its source rate in vastly different environments from pristine Antarctica to polluted India. Estimated concentrations varied only 2 orders of magnitude, but the source rates for the vapours varied up to 4 orders of magnitude. Highest source rates were in New Delhi and lowest were in the Antarctica. Indirect methods were applied to study the growth of freshly formed particles in the atmosphere. Also a newly developed Water Condensation Particle Counter, TSI 3785, was found to be a potential candidate to detect water solubility and thus indirectly composition of atmospheric ultra-fine particles. Based on indirect methods, the relative roles of sulphuric acid, non-volatile material and coagulation were investigated in rural Melpitz, Germany. Condensation of non-volatile material explained 20-40% and sulphuric acid the most of the remaining growth up to a point, when nucleation mode reached 10 to 20 nm in diameter. Coagulation contributed typically less than 5%. Furthermore, hygroscopicity measurements were applied to detect the contribution of water soluble and insoluble components in Athens. During more polluted days, the water soluble components contributed more to the growth. During less anthropogenic influence, non-soluble compounds explained a larger fraction of the growth. In addition, long range transport to a measurement station in Finland in a relatively polluted air mass was found to affect the hygroscopicity of the particles. This aging could have implications to cloud formation far away from the pollution sources.

Growth and exchange rate volatility: a panel data analysis

The aim of this article is to assess the role of real effective exchange rate volatility on long-run economic growth for a set of 82 advanced and emerging economies using a panel data set ranging from 1970 to 2009. With an accurate measure for exchange rate volatility, the results for the two-step system GMM panel growth models show that a more (less) volatile RER has significant negative (positive) impact on economic growth and the results are robust for different model specifications. In addition to that, exchange rate stability seems to be more important to foster long-run economic growth than exchange rate misalignment

Seeking growth under financial volatility

Includes bibliography

Economic growth and real volatility: The case of Latin America and the Caribbean

Using a new database of quarterly data for 21 countries of Latin America and the Caribbean for the 1990-2012 period, this document shows that the duration of GDP contractions appears to be a rather robust indicator of real volatility, and is negatively correlated with long run growth in Latin America and the Caribbean during the period. These results are consistent with different theoretical hypotheses in the literature that relate the duration of GDP contractions with economic growth. They also show that the relationship between real volatility and economic growth in the region is robust to the inclusion of external variables that control for external uncertainty and volatility.

The Great Moderation and the Relationship between Output Growth and Its Volatility

This study examines the effect of the Great Moderation on the relationship between U.S. output growth and its volatility over the period 1947 to 2006. First, we consider the possible effects of structural change in the volatility process. In so doing, we employ GARCH-M and ARCH-M specifications of the process describing output growth rate and its volatility with and without a one-time structural break in volatility. Second, our data analyses and empirical results suggest no significant relationship between the output growth rate and its volatility, favoring the traditional wisdom of dichotomy in macroeconomics. Moreover, the evidence shows that the time-varying variance falls sharply or even disappears once we incorporate a one-time structural break in the unconditional variance of output starting 1982 or 1984. That is, the integrated GARCH effect proves spurious. Finally, a joint test of a trend change and a one-time shift in the volatility process finds that the one-time shift dominates.

Modeling the Volatility of Real GDP Growth: The Case of Japan Revisited

Previous studies (e.g., Hamori, 2000; Ho and Tsui, 2003; Fountas et al., 2004) find high volatility persistence of economic growth rates using generalized autoregressive conditional heteroskedasticity (GARCH) specifications. This paper reexamines the Japanese case, using the same approach and showing that this finding of high volatility persistence reflects the Great Moderation, which features a sharp decline in the variance as well as two falls in the mean of the growth rates identified by Bai and Perronâs (1998, 2003) multiple structural change test. Our empirical results provide new evidence. First, excess kurtosis drops substantially or disappears in the GARCH or exponential GARCH model that corrects for an additive outlier. Second, using the outlier-corrected data, the integrated GARCH effect or high volatility persistence remains in the specification once we introduce intercept-shift dummies into the mean equation. Third, the time-varying variance falls sharply, only when we incorporate the break in the variance equation. Fourth, the ARCH in mean model finds no effects of our more correct measure of output volatility on output growth or of output growth on its volatility.