Ten Things You Should Know About the Dynamic Conditional Correlation Representation

Massimiliano Caporin and Michael McAleer

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

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.

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 (search for similar items in EconPapers)
JEL-codes: C18 C32 C58 G17 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2013-06-08
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (85)

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https://repec.canterbury.ac.nz/cbt/econwp/1321.pdf (application/pdf)

Related works:
Journal Article: 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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