Stationarity and invertibility of a dynamic correlation matrix

McAleer, Michael

Kybernetika, Tome 54 (2018) no. 2, pp. 363-374

Abstract (VO)

One of the most widely-used multivariate conditional volatility models is the dynamic conditional correlation (or DCC) specification. However, the underlying stochastic process to derive DCC has not yet been established, which has made problematic the derivation of asymptotic properties of the Quasi-Maximum Likelihood Estimators (QMLE). To date, the statistical properties of the QMLE of the DCC parameters have purportedly been derived under highly restrictive and unverifiable regularity conditions. The paper shows that the DCC model can be obtained from a vector random coefficient moving average process, and derives the stationarity and invertibility conditions of the DCC model. The derivation of DCC from a vector random coefficient moving average process raises three important issues, as follows: (i) demonstrates that DCC is, in fact, a dynamic conditional covariance model of the returns shocks rather than a dynamic conditional correlation model; (ii) provides the motivation, which is presently missing, for standardization of the conditional covariance model to obtain the conditional correlation model; and (iii) shows that the appropriate ARCH or GARCH model for DCC is based on the standardized shocks rather than the returns shocks. The derivation of the regularity conditions, especially stationarity and invertibility, may subsequently lead to a solid statistical foundation for the estimates of the DCC parameters. Several new results are also derived for univariate models, including a novel conditional volatility model expressed in terms of standardized shocks rather than returns shocks, as well as the associated stationarity and invertibility conditions.

Détail

DOI : 10.14736/kyb-2018-2-0363

Classification : 62C22, 62C52, 62C58, 62G32, 62M10
Keywords: dynamic conditional correlation; dynamic conditional covariance; vector random coefficient moving average; stationarity; invertibility; asymptotic properties

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