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

We perform an extensive Monte Carlo study of efficient method of moments (E MM) estimation of a stochastic volatility model. EMM uses the expectation u nder the structural model of the score from an auxiliary model as moment co nditions. We examine the sensitivity to the choice of auxiliary model using ARCH, GARCH, and EGARCH models for the score as well as nonparametric exte nsions. EMM efficiency approaches that of maximum likelihood for larger sam ple sizes. Inference is sensitive to the choice of auxiliary model in small samples, but robust in larger samples. Specification tests and 't-tests' s how little size distortion. (C) 1999 Elsevier Science S.A. All rights reser ved. JEL classtficatiolz: C15; C22.