Econometrics 2013, 1(1), 115-126; doi:10.3390/econometrics1010115
Article

Ten Things You Should Know about the Dynamic Conditional Correlation Representation

Received: 13 May 2013; in revised form: 7 June 2013 / Accepted: 14 June 2013 / Published: 21 June 2013
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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
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MDPI and ACS Style

Caporin, M.; McAleer, M. Ten Things You Should Know about the Dynamic Conditional Correlation Representation. Econometrics 2013, 1, 115-126.

AMA Style

Caporin M, McAleer M. Ten Things You Should Know about the Dynamic Conditional Correlation Representation. Econometrics. 2013; 1(1):115-126.

Chicago/Turabian Style

Caporin, Massimiliano; McAleer, Michael. 2013. "Ten Things You Should Know about the Dynamic Conditional Correlation Representation." Econometrics 1, no. 1: 115-126.

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