Weak Diffusion Limits of Dynamic Conditional Correlation Models

Christian Hafner, Sébastien Laurent and Francesco Violante ()

No 2016009, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: The properties of dynamic conditional correlation (DCC) models, introduced more than a decade ago, are still not entirely known. 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 often used 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: diffusion limits; GARCH; quasi approximate maximum likelihood (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 (search for similar items in EconPapers)
Date: 2016-04-13
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://sites.uclouvain.be/core/publications/coredp/coredp2016.html (application/pdf)

Related works:
Journal Article: 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 (2017)
Working Paper: Weak Diffusion Limits of Dynamic Conditional Correlation Models (2016)
Working Paper: Weak diffusion limits of dynamic conditional correlation models (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2016009

Access Statistics for this paper

More papers in LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Alain GILLIS ().