I want to estimate a model where I have a mean equation of:
Investment = α + βY +µR +ϴD+ ϵ
Where alpha is an intercept, Y is production, R is the interest rate and D is a dummy variable for risk?
I do not know if it is possible/allowed to model the volatility of investment in this way?
And I do not know what my variance equation will be. Is it just:
Vt= α + Rt-1(squared)
Where Rt-1(squared) is my residuals from the mean equation in t-1 squared?
I will be very greatful for all insight:)