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

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.