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.
