Ten Things You Should Know about the Dynamic Conditional Correlation Representation

Massimiliano Caporin and Michael McAleer

Econometrics, 2013, vol. 1, issue 1, 1-12

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 Generalized Autoregressive Conditional Correlation (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 Baba, Engle, Kraft and Kroner (BEKK) in small systems; and DCC may be a useful filter or a diagnostic check, but it is not a model.

Keywords: DCC representation; BEKK; GARCC; stated representation; derived model; conditional correlations; two step estimators; assumed asymptotic properties; filter (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (85)

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Related works:
Working Paper: Ten Things You Should Know About the Dynamic Conditional Correlation Representation (2013)
Working Paper: Ten Things You Should Know About the Dynamic Conditional Correlation Representation (2013)
Working Paper: Ten Things You Should Know About the Dynamic Conditional Correlation Representation (2013)
Working Paper: Ten Things you should know about the Dynamic Conditional Correlation Representation (2013)
Working Paper: Ten Things You Should Know About the Dynamic Conditional Correlation Representation (2013)
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