Abstract

http://ssrn.com/abstract=1549167
 
 

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Do We Really Need Both BEKK and DCC? A Tale of Two Multivariate GARCH Models


Massimiliano Caporin


University of Padova - Department of Economics and Management "Marco Fanno"

Michael McAleer


Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

February 7, 2010


Abstract:     
The management and monitoring of very large portfolios of financial assets are routine for many individuals and organizations. The two most widely used models of conditional covariances and correlations in the class of multivariate GARCH models are BEKK and DCC. It is well known that BEKK suffers from the archetypal “curse of dimensionality,” whereas DCC does not. It is argued in this paper that this is a misleading interpretation of the suitability of the two models for use in practice. The primary purpose of this paper is to analyze the similarities and dissimilarities between BEKK and DCC, both with and without targeting, on the basis of the structural derivation of the models, the availability of analytical forms for the sufficient conditions for existence of moments, sufficient conditions for consistency and asymptotic normality of the appropriate estimators, and computational tractability for ultra large numbers of financial assets. Based on theoretical considerations, the paper sheds light on how to discriminate between BEKK and DCC in practical applications.

Number of Pages in PDF File: 19

Keywords: Conditional Correlations, Conditional Covariances, Diagonal Models, Forecasting, Generalized Models, Hadamard Models, Scalar models, Targeting

JEL Classification: C32, G11, G17, G32

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Date posted: February 7, 2010  

Suggested Citation

Caporin, Massimiliano and McAleer, Michael, Do We Really Need Both BEKK and DCC? A Tale of Two Multivariate GARCH Models (February 7, 2010). Available at SSRN: http://ssrn.com/abstract=1549167 or http://dx.doi.org/10.2139/ssrn.1549167

Contact Information

Massimiliano Caporin (Contact Author)
University of Padova - Department of Economics and Management "Marco Fanno" ( email )
Via Del Santo 33
Padova, 35123
Italy
+39-049-8274258 (Phone)
+39-049-827-4211 (Fax)
Michael McAleer
Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )
Rotterdam
Netherlands
Tinbergen Institute
Rotterdam
Netherlands
University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics
Tokyo
Japan
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