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Weak diffusion limits of dynamic conditional correlation models

Christian Hafner (), Sébastien Laurent and Francesco Violante ()

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: The properties of dynamic conditional correlation (DCC) models are still not entirely understood. This paper fills one of the gaps by deriving weak diffusion limits of a modified version of the classical DCC model. The limiting system of stochastic differential equations is characterized by a diffusion matrix of reduced rank. The degeneracy is due to perfect collinearity between the innovations of the volatility and correlation dynamics. For the special case of constant conditional correlations, a non-degenerate diffusion limit can be obtained. Alternative sets of conditions are considered for the rate of convergence of the parameters, obtaining time-varying but deterministic variances and/or correlations. A Monte Carlo experiment confirms that the quasi approximate maximum likelihood (QAML) method to estimate the diffusion parameters is inconsistent for any fixed frequency, but that it may provide reasonable approximations for sufficiently large frequencies and sample sizes.

Keywords: cDCC; Weak diffusion limits; QAML; CCC; GARCH diffusion (search for similar items in EconPapers)
JEL-codes: C13 C22 C51 (search for similar items in EconPapers)
Pages: 32
Date: 2015-01-14
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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https://repec.econ.au.dk/repec/creates/rp/15/rp15_03.pdf (application/pdf)

Related works:
Journal Article: WEAK DIFFUSION LIMITS OF DYNAMIC CONDITIONAL CORRELATION MODELS (2017) Downloads
Working Paper: Weak Diffusion Limits of Dynamic Conditional Correlation Models (2017)
Working Paper: Weak diffusion limits of dynamic conditional correlation models (2017)
Working Paper: Weak Diffusion Limits of Dynamic Conditional Correlation Models (2017)
Working Paper: Weak Diffusion Limits of Dynamic Conditional Correlation Models (2016) Downloads
Working Paper: Weak Diffusion Limits of Dynamic Conditional Correlation Models (2016) Downloads
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