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Unobserved components with stochastic volatility: Simulation‐based estimation and signal extraction

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  • Mengheng Li
  • Siem Jan Koopman

Abstract

The unobserved components time series model with stochastic volatility has gained much interest in econometrics, especially for the purpose of modelling and forecasting inflation. We present a feasible simulated maximum likelihood method for parameter estimation from a classical perspective. The method can also be used for evaluating the marginal likelihood function in a Bayesian analysis. We show that our simulation‐based method is computationally feasible, for both univariate and multivariate models. We assess the performance of the method in a Monte Carlo study. In an empirical study, we analyse U.S. headline inflation using different univariate and multivariate model specifications.

Suggested Citation

  • Mengheng Li & Siem Jan Koopman, 2021. "Unobserved components with stochastic volatility: Simulation‐based estimation and signal extraction," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(5), pages 614-627, August.
    • Handle: RePEc:wly:japmet:v:36:y:2021:i:5:p:614-627
    DOI: 10.1002/jae.2831
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