The Local Whittle Estimator of Long Memory Stochastic Volatility

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 yields more accurate confidence intervals than the widely-used GPH estimator. In an empirical analysis of the daily Deutschemark/Dollar exchange rate, the new estimator indicates stronger persistence in volatility than the GPH estimator, provided that a large number of frequencies is used.Statistics Working Papers Serie