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Ten Things You Should Know About the Dynamic Conditional Correlation Representation

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Caporin, Massimiliano and McAleer, Michael (2013) Ten Things You Should Know About the Dynamic Conditional Correlation Representation. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 21, 2013, ] (Unpublished)

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Official URL: http://eprints.ucm.es/22109/


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Abstract

The purpose of the paper is to discuss ten things potential users should know about the limits of the Dynamic Conditional Correlation (DCC) representation for estimating and forecasting time-varying conditional correlations. The reasons given for caution about the use of DCC include the following: DCC represents the dynamic conditional covariances of the standardized residuals, and hence does not yield dynamic conditional correlations; DCC is stated rather than derived; DCC has no moments; DCC does not have testable regularity conditions; DCC yields inconsistent two step estimators; DCC has no asymptotic properties; DCC is not a special case of GARCC, which has testable regularity conditions and standard asymptotic properties; DCC is not dynamic empirically as the effect of news is typically extremely small; DCC cannot be distinguished empirically from diagonal BEKK in small systems; and DCC may be a useful filter or a diagnostic check, but it is not a model.


Item Type:Working Paper or Technical Report
Additional Information:

Revised: June 2013
The authors most are grateful to two referees for very helpful comments and suggestions. For financial support, the second author wishes to acknowledge the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science. An earlier version of this paper was distributed as “Ten Things You Should Know About DCC”.

Uncontrolled Keywords:DCC representation, BEKK, GARCC, Stated representation, Derived model, Conditional covariances, Conditional correlations, regularity conditions, moments, two step estimators, Assumed properties, Asymptotic properties, filter, Diagnostic check.
Subjects:Social sciences > Economics > Econometrics
JEL:C18, C32, C58, G17
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:21
ID Code:22109
Deposited On:28 Jun 2013 07:14
Last Modified:29 Jan 2018 12:59

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