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

Ten Things You Should Know about the Dynamic Conditional Correlation Representation

1 Department of Economics and Management "Marco Fanno", University of Padova, Via del Santo 33, 35123 Padova, Italy 2 Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, 3000 DR Rotterdam, Netherlands 3 Department of Quantitative Economics, Complutense University of Madrid, 28223 Pozuelo de Alarcón, Madrid, Spain 4 Institute of Economic Research, Kyoto University, Kyoto 606-8501, Japan
* Author to whom correspondence should be addressed.
Received: 13 May 2013; in revised form: 7 June 2013 / Accepted: 14 June 2013 / Published: 21 June 2013
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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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