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Duke Economics Working Paper #95-36

Estimation of Stochastic Volatility Models with Diagnostics

George E. Tauchen
A. R. Gallant
D. Hsieh


Efficient Method of Moments (EMM) is used to fit the standard stochastic volatility model and various extensions to several daily financial time series. EMM matches to the score of a model determined by data analysis called the score generator. Discrepancies reveal characteristics of data that stochastic volatility models cannot approximate. The two score generators employed here are Nonparametric ARCH and Nonlinear Nonparametric. With the first, the standard model is rejected, although some extensions are nearly accepted. With the second, all versions are rejected. The extensions required for an adequate fit are so elaborate that nonparametric specifications ar eprobably more convenient.

JEL: G12

Published in Journal of Econometrics, Vol. 81, No. 1, 1997, pp. 159-192.