Do We Really Need Both BEKK and DCC? A Tale of Two Multivariate GARCH Models
19 Pages Posted: 7 Feb 2010
Date Written: 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.
Keywords: Conditional Correlations, Conditional Covariances, Diagonal Models, Forecasting, Generalized Models, Hadamard Models, Scalar models, Targeting
JEL Classification: C32, G11, G17, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Measuring and Testing the Impact of News on Volatility
By Robert F. Engle and Victor K. Ng
-
Caviar: Conditional Value at Risk by Quantile Regression
By Simone Manganelli and Robert F. Engle
-
Dynamic Conditional Correlation - a Simple Class of Multivariate GARCH Models
-
Dynamic Conditional Correlation a Simple Class of Multivariate GARCH Models
-
Dynamic Conditional Correlation - a Simple Class of Multivariate GARCH Models
-
Dynamic Conditional Correlation : A Simple Class of Multivariate GARCH Models
-
Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills
By Robert F. Engle, Victor Ng, ...
-
Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH
By Kevin Sheppard and Robert F. Engle
-
Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH
By Robert F. Engle and Kevin Sheppard
-
Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH
By Robert F. Engle and Kevin Sheppard