WEAK DIFFUSION LIMITS OF DYNAMIC CONDITIONAL CORRELATION MODELS. (13th June 2016)

• Record Type: Journal Article
• Authors: Hafner, Christian M.; Laurent, Sebastien; Violante, Francesco
• Is Part Of: Econometric theory. Volume 33:Number 3(2017)
• Page Start: 691
• Page End: 716
• Publication Date: 2016-06-13
• Subjects: Econometrics -- Periodicals; 330.01519505
• DOI: 10.1017/S0266466616000128
• Languages: English
• ISSNs: 0266-4666

Abstract

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 nondegenerate 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.