Efficient method of moments estimation of a stochastic volatility model: A Monte Carlo study

Torben G. Andersen, Hyung Jin Chung, Bent E. Sørensen*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

116 Scopus citations

Abstract

We perform an extensive Monte Carlo study of efficient method of moments (EMM) estimation of a stochastic volatility model. EMM uses the expectation under the structural model of the score from an auxiliary model as moment conditions. We examine the sensitivity to the choice of auxiliary model using ARCH, GARCH, and EGARCH models for the score as well as nonparametric extensions. EMM efficiency approaches that of maximum likelihood for larger sample sizes. Inference is sensitive to the choice of auxiliary model in small samples, but robust in larger samples. Specification tests and 't-tests' show little size distortion.

Original languageEnglish (US)
Pages (from-to)61-87
Number of pages27
JournalJournal of Econometrics
Volume91
Issue number1
DOIs
StatePublished - Jul 1999

Keywords

  • EMM
  • GMM
  • Monte Carlo
  • Stochastic volatility

ASJC Scopus subject areas

  • Economics and Econometrics

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