Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models
AbstractLarge and very large portfolios of financial assets are routine for many individuals and organizations. The two most widely used models of conditional covariances and correlations are BEKK and DCC. BEKK suffers from the archetypal "curse of dimensionality" whereas DCC does not. This is a misleading interpretation of the suitability of the two models to be used in practice. The primary purposes of the paper are to define targeting as an aid in estimating matrices associated with large numbers of financial assets, analyze the similarities and dissimilarities between BEKK and DCC, both with and without targeting, on the basis of structural derivation, the analytical forms of the sufficient conditions for the existence of moments, and the sufficient conditions for consistency and asymptotic normality, and computational tractability for very large (that is, ultra high) numbers of financial assets, to present a consistent two step estimation method for the DCC model, and to determine whether BEKK or DCC should be preferred in practical applications.
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Length: 30 pages
Date of creation: Aug 2009
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Other versions of this item:
- Massimiliano Caporin & Michael McAleer, 2009. "Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models," CARF F-Series CARF-F-156, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- Massimiliano Caporin & Michael McAleer, 2009. "Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models," Documentos del Instituto Complutense de AnÃ¡lisis EconÃ³mico 0904, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-22 (All new papers)
- NEP-ECM-2009-08-22 (Econometrics)
- NEP-ETS-2009-08-22 (Econometric Time Series)
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