Department of Economics and Business Economics

Weak diffusion limits of dynamic conditional correlation models

Research output: Working paperResearch

Documents

  • rp15_03

    Submitted manuscript, 548 KB, PDF document

  • Christian M. Hafner, Universite Catholique de Louvain, Belgium
  • Sebastien Laurent, Aix-Marseille University, France
  • Francesco Violante
The properties of dynamic conditional correlation (DCC) models are still not entirely understood. 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 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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages32
Publication statusPublished - 15 Jan 2015
SeriesCREATES Research Papers
Number2015-03

See relations at Aarhus University Citationformats

Download statistics

No data available

ID: 84318692