The Local Whittle Estimator of Long-Memory Stochastic Volatility

Posted: 29 Feb 2008

See all articles by Bonnie K. Ray

Bonnie K. Ray

IBM Corporation - Thomas J. Watson Research Center

Clifford M. Hurvich

Stern School of Business, New York University; New York University (NYU) - Department of Information, Operations, and Management Sciences

Multiple version iconThere are 4 versions of this paper

Date Written: 2003

Abstract

We propose a new semiparametric estimator of the degree of persistence in volatility for long memory stochastic volatility (LMSV) models. The estimator uses the periodogram of the log squared returns in a local Whittle criterion which explicitly accounts for the noise term in the LMSV model. Finite-sample and asymptotic standard errors for the estimator are provided. An extensive simulation study reveals that the local Whittle estimator is much less biased and that the finite-sample standard errors yield more accurate confidence intervals than the widely-used GPH estimator. The estimator is also found to be robust against possible leverage effects. In an empirical analysis of the daily Deutsche Mark/US Dollar exchange rate, the new estimator indicates stronger persistence in volatility than the GPH estimator, provided that a large number of frequencies is used.

Keywords: long-range dependence, nonlinearity, semiparametric estimation

Suggested Citation

Ray, Bonnie K. and Hurvich, Clifford M., The Local Whittle Estimator of Long-Memory Stochastic Volatility ( 2003). Journal of Financial Econometrics, Vol. 1, Issue 3, pp. 445-470, 2003. Available at SSRN: https://ssrn.com/abstract=821709

Bonnie K. Ray (Contact Author)

IBM Corporation - Thomas J. Watson Research Center ( email )

Route 134
Kitchawan Road
Yorktown Heights, NY 10598
United States

Clifford M. Hurvich (Contact Author)

Stern School of Business, New York University ( email )

44 West 4th Street
New York, NY 10012-1126
United States

New York University (NYU) - Department of Information, Operations, and Management Sciences

44 West Fourth Street
New York, NY 10012
United States

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