Template-type: ReDIF-Paper 1.0
Author-Name:
 Michael McAleer
Author-Workplace-Name:
 Department of Quantitative Finance National Tsing Hua University, Taiwan and Econometric Institute Erasmus School of 
	Economics Erasmus University Rotterdam, The Netherlands and Department of Quantitative Economics Complutense University of 
	Madrid, Spain And Institute of Advanced Sciences Yokohama National University, Japan.
Title: What They Did Not Tell You About Algebraic (Non-)Existence, Mathematical (IR-)Regularity and (Non-)Asymptotic Properties of the Dynamic Conditional 
	Correlation (DCC) Model
Abstract: In order to hedge efficiently, persistently high negative covariances or, equivalently, correlations, between risky assets and the hedging instruments 
	are intended to mitigate against financial risk and subsequent losses. If there is more than one hedging instrument, multivariate covariances and 
	correlations will have to be calculated. As optimal hedge ratios are unlikely to remain constant using high frequency data, it is essential to specify 
	dynamic time-varying models of covariances and correlations. These values can either be determined analytically or numerically on the basis of highly 
	advanced computer simulations. Analytical developments are occasionally promulgated for multivariate conditional volatility models. The primary purpose of 
	the paper is to analyse purported analytical developments for the only multivariate dynamic conditional correlation model to have been developed to date, 
	namely Engle’s (2002) widely-used Dynamic Conditional Correlation (DCC) model. Dynamic models are not straightforward (or even possible) to translate in 
	terms of the algebraic existence, underlying stochastic processes, specification, mathematical regularity conditions, and asymptotic properties of 
	consistency and asymptotic normality, or the lack thereof. The paper presents a critical analysis, discussion, evaluation and presentation of caveats 
	relating to the DCC model, and an emphasis on the numerous dos and don’ts in implementing the DCC and related model in practice.
Classification-JEL: C22, C32, C51, C52, C58, C62, G32.
Keywords: Hedging, Covariances, Correlations, Existence, Mathematical regularity, Invertibility, Likelihood function, Statistical asymptotic properties, Caveats, 
	Practical implementation.
Length: 18 pages 
Creation-Date: 2019-03
Number: 2019-17
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1917.txt
File-URL: https://eprints.ucm.es/id/eprint/54809/1/1917.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:1917