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Theoretical and Empirical Differences Between Diagonal and Full BEKK for Risk Management

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  • Tan, A.C.
  • McAleer, M.J.

Abstract

The purpose of the paper is to explore the relative biases in the estimation of the Full BEKK model as compared with the Diagonal BEKK model, which is used as a theoretical and empirical benchmark. Chang and McAleer [4] show that univariate GARCH is not a special case of multivariate GARCH, specically, the Full BEKK model, and demonstrate that Full BEKK which, in practice, is estimated almost exclusively, has no underlying stochastic process, regularity conditions, or asymptotic properties. Diagonal BEKK (DBEKK) does not suf- fer from these limitations, and hence provides a suitable benchmark. We use simulated nancial returns series to contrast estimates of the conditional vari- ances and covariances from DBEKK and BEKK. The results of non-parametric tests suggest evidence of considerable bias in the Full BEKK estimates. The results of quantile regression analysis show there is a systematic relationship between the two sets of estimates as we move across the quantiles. Estimates of conditional variances from Full BEKK, relative to those from DBEKK, are lower in the left tail and higher in the right tail.

Suggested Citation

  • Tan, A.C. & McAleer, M.J., 2017. "Theoretical and Empirical Differences Between Diagonal and Full BEKK for Risk Management," Econometric Institute Research Papers 17-069/III, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:101765
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    References listed on IDEAS

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    1. repec:eee:finlet:v:30:y:2019:i:c:p:221-227 is not listed on IDEAS
    2. repec:ris:apltrx:0353 is not listed on IDEAS

    More about this item

    Keywords

    DBEKK; BEKK; Regularity Conditions; Asymptotic Properties; Non-Parametric; Bias; Qantile regression;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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