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 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 BEKK in small systems; and DCC may be a useful filter or a diagnostic check, but it is not a model.

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Tinbergen Institute
hdl.handle.net/1765/40416
Tinbergen Institute Discussion Paper Series
Discussion paper / Tinbergen Institute
Erasmus School of Economics

Caporin, M., & McAleer, M. (2013). Ten Things You Should Know About the
Dynamic Conditional Correlation
Representation (No. TI 13-078/III ). Discussion paper / Tinbergen Institute (pp. 1–22). Retrieved from http://hdl.handle.net/1765/40416