Dynamic Conditional Correlation: On properties and estimation
AbstractWe address some issues that arise with the Dynamic Conditional Correlation (DCC) model. We prove that the DCC large system estimator (DCC estimator) can be inconsistent, and that the traditional interpretation of the DCC correlation parameters can lead to misleading conclusions. We then suggest a more tractable dynamic conditional correlation model (cDCC model). A related large system estimator (cDCC estimator) is described and heuristically proven to be consistent. Sufficient stationarity conditions for cDCC processes of interest, including the covariance-return process, are established. The DCC and cDCC estimators are compared by means of applications to simulated and real data.
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Bibliographic InfoPaper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0142.
Length: 28 pages
Date of creation: Nov 2011
Date of revision:
Multivariate GARCH Model; Quasi-Maximum-Likelihood; Two-step Estimation; Integrated Correlation; Generalized Profile Likelihood.;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-08 (All new papers)
- NEP-ECM-2012-05-08 (Econometrics)
- NEP-ETS-2012-05-08 (Econometric Time Series)
- NEP-ORE-2012-05-08 (Operations Research)
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