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Efficient Estimation of the Stochastic Volatility Model by the Empirical Characteristic Function Method

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  • Knight, John
  • Satchell, Stephen
  • Yu, Jun

Abstract

This paper estimates the stochastic volatility model using the empirical characteristic function method. This procedure has the same asymptotic efficiency as maximum likelihood, and is thus a desirable method to use when the likelihood function is unknown. The stochastic volatility model has no closed form for its likelitiood but it does have a known characteristic function. A Monte Carlo study shows that thc empirical characteristic function method is a viable procedure for the stochastic volatility model. An application is considered for S&P 500 daily returns. Our results suggest much lower persistence than is normally found.

Suggested Citation

  • Knight, John & Satchell, Stephen & Yu, Jun, 1999. "Efficient Estimation of the Stochastic Volatility Model by the Empirical Characteristic Function Method," Working Papers 205, Department of Economics, The University of Auckland.
    • Handle: RePEc:auc:wpaper:205
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    File URL: http://hdl.handle.net/2292/205
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    Keywords

    Empirical Characteristic; Economics;

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