Dynamic Conditional Correlation: On Properties and Estimation

This article addresses some of the issues that arise with the Dynamic Conditional Correlation (DCC) model. It is proven that the DCC large system estimator can be inconsistent, and that the traditional interpretation of the DCC correlation parameters can result in misleading conclusions. Here, we suggest a more tractable DCC model, called the c DCC model. The c DCC model allows for a large system estimator that is heuristically proven to be consistent. Sufficient stationarity conditions for c DCC processes of interest are established. The empirical performances of the DCC and c DCC large system estimators are compared via simulations and applications to real data.