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

19 Pages Posted: 7 Feb 2010  

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

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

Multiple version iconThere are 2 versions of this paper

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

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: https://ssrn.com/abstract=1549167 or http://dx.doi.org/10.2139/ssrn.1549167

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

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

Paper statistics

Downloads
492
Rank
45,394
Abstract Views
2,819