DCC

Question 1

DCC models are based on the idea of…

Answer 1

…modelling volatilities and correlations separately

Question 2

DCC models require….

Answer 2

… a number of ‘hacks’ to get the model to behave in the ‘correct’ way.

Question 3

DCC Hack 1

Answer 3

Problem: need to make sure that Rt has correct specification for each period t.
Solution: use a pseudo-correlation matrix Q

Question 4

DCC Hack 2

Answer 4

Problem: need to keep the number of parameters small
Solution: model Q using a GARCH-type equation

Question 5

DCC Hack 3

Answer 5

Problem: by now I have given up on pretending I understand what all these problems are.
Solution: use correlation-targeting to get rid of one of the matrices.
Which matrix? Fuck knows.

Question 6

Re-writing the GARCH-DCC model as a factor model

Answer 6

use black magick

Question 7

DCC model: criticisms

Answer 7

still difficult with many variables