First, they characterize the properties of the solution to this class of models. Second, the authors take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in large-scale models, such as those often employed by policy-making institutions. As an application, the authors use their algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Their application shows the importance of stochastic volatility in accounting for the dynamics of the data.View the Full Working Paper
Estimating Dynamic Equilibrium Models with Stochastic Volatility
WP 13-19 - The authors propose a novel method to estimate dynamic equilibrium models with stochastic volatility.