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GMM Estimation of a Stochastic Volatility Model with Realized Volatility: A Monte Carlo Study

Author

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  • Pierre Chausse

    (Department of Economics, University of Waterloo)

  • Dinghai Xu

    (Department of Economics, University of Waterloo)

Abstract

This paper investigates alternative generalized method of moments (GMM) estimation procedures of a stochastic volatility model with realized volatility measures. The extended model can accommodate a more general correlation structure. General closed form moment conditions are derived to examine the model properties and to evaluate the performance of various GMM estimation procedures under Monte Carlo environment, including standard GMM, principal component GMM, robust GMM and regularized GMM. An application to five company stocks and one stock index is also provided for an empirical demonstration.

Suggested Citation

  • Pierre Chausse & Dinghai Xu, 2012. "GMM Estimation of a Stochastic Volatility Model with Realized Volatility: A Monte Carlo Study," Working Papers 1203, University of Waterloo, Department of Economics, revised May 2012.
    • Handle: RePEc:wat:wpaper:1203
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    References listed on IDEAS

    as
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    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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