Dynamic Conditional

Correlation & Asymmetric

Dynamic Conditional
Correlation – DCC & ADCC
GARCH Models
Dynamic & Asymmetric Dynamic Conditional Correlation – DCC & ADCC
GARCH Model
Dynamic conditional correlation model is applied when the assumption is take that correlation
is time varying. ARMA GARCH model assumes that correlation is constant over the period of
time but if it is time varying, then DCC model must be used. Moreover, if there exists any
asymmetry in the market then these asymmetric effects will be captured by using ADCC model.

Step 1:
First of all, download the Eviews Add-in of 2-Step Dynamic Conditional Correlation from
Google and install it. To do this perform the following steps …

i. Go to Google.com
ii. Write Eviews add-in in search box
iii. Open the first link
iv. Press Control + F and type dccgarch11 in search box.

v. Download and install it in Eviews

vi. Now open Eviews and go to the TAB of Add-in.
vii. You will see an extra option added names as “Dynamic Conditional Correlation 2-Step”
as shown in figure below …
viii. Now copy your data/series from Excel in Eviews.
ix. Open this option. You will see the following window …

x. Write the name of both series in the Dialogue box of “Return Series” as mentioned
below and just click OK.
 xi. You will get one dccout01 variable and two equations of GARCH in your work file
after processing as shown below …

xii. eq_garch_r1_01 is the GARCH equation of r_c series.

xiii. eq_garch_r2_01 is the GARCH equation of r_og series.
xiv. Dccout01 is the DCC model output for these two series.
xv. The above mentioned model is the final model of DCC. As you can see that the both
thetas are reported there with their significant values and coefficients.

Note: One thing that must be checked before the interpretation of the model is that, the stability
condition should be met. Means, the answer of theta(1) + theta(2) must be less than 1. If it’s
not less than 1, then DCC will be applicable.

Step 2:
i. To apply the ADCC model, just check the “Asymmetric DCC Model” option on the top
right corner of DCC window and click OK as shown in the figure below …

ii. You will another dccout02 variable and two more equations of GARCH in your work
file after processing.
iii. eq_garch_r1_02 is the GARCH equation of r_c series.
iv. eq_garch_r2_02 is the GARCH equation of r_og series.
v. Dccout02 is the ADCC model output for these two series.

vi. The below mentioned model is the final model of ADCC. As you can see that all thetas
are reported there with their significant values and coefficients.