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Nonparametric Estimation of Average Volatility Differentials in Selection Models with an Application to Returns to Schooling

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  • Stacey Chen

Abstract

We consider identification and estimation of a selection model in which the variance of the outcome variable, as well as the mean, depends on selection. Under a bivariate symmetry condition, we show that the average volatility differential, defined as the difference in variance levels between those who selected and those who did not, can be identified by a matching method involving conditional interquartile ranges. An estimation procedure, based on nonparametric quantile regressions and kernel weighted matching methods, is proposed, and its asymptotic properties are derived. A simulation study indicates the new estimator performs well in finite samples. The estimator is applied to measure the volatility differential of log wage rates for college versus high school careers. We find that the volatility differential is significantly positive for a four-year college education but almost zero for a two-year college education. Results indicate that the volatility differential of a four-year college fell by more than 50 percent from the 1980's to the 1990's.

Suggested Citation

  • Stacey Chen, 2003. "Nonparametric Estimation of Average Volatility Differentials in Selection Models with an Application to Returns to Schooling," Discussion Papers 03-02, University at Albany, SUNY, Department of Economics.
    • Handle: RePEc:nya:albaec:03-02
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    References listed on IDEAS

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    Cited by:

    1. Lewbel, Arthur, 2007. "Endogenous selection or treatment model estimation," Journal of Econometrics, Elsevier, vol. 141(2), pages 777-806, December.
    2. Stacey Chen, 2003. "Does COllege Attendance Increase Wage Volatility," Discussion Papers 03-01, University at Albany, SUNY, Department of Economics.

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    More about this item

    Keywords

    self selection models; average volatility differential; nonparametric quantile regression; schooling choice.;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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