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Weak Diffusion Limits of Dynamic Conditional Correlation Models

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.
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Contributor : Elisabeth Lhuillier Connect in order to contact the contributor
Submitted on : Tuesday, September 19, 2017 - 11:59:18 AM
Last modification on : Wednesday, February 9, 2022 - 3:41:49 AM

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Christian M. Hafner, Sébastien Laurent, Francesco Violante. Weak Diffusion Limits of Dynamic Conditional Correlation Models. Econometric Theory, 2017, 33 (03), pp.691--716. ⟨10.1017/S0266466616000128⟩. ⟨hal-01590010⟩



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