Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models
Large 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.
|Date of creation:||2009|
|Contact details of provider:|| Phone: +34 913942604|
Web page: https://www.ucm.es/icae
More information through EDIRC
|Order Information:|| Postal: Facultad de Ciencias Económicas y Empresariales. Pabellón prefabricado, 1ª Planta, ala norte. Campus de Somosaguas, 28223 - POZUELO DE ALARCÓN (MADRID)|
Web: https://www.ucm.es/fundamentos-analisis-economico2/documentos-de-trabajo-del-icae Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ling, Shiqing & McAleer, Michael, 2003.
"Asymptotic Theory For A Vector Arma-Garch Model,"
Cambridge University Press, vol. 19(02), pages 280-310, April.
- Shiqing Ling & Michael McAleer, 2001. "Asymptotic Theory for a Vector ARMA-GARCH Model," ISER Discussion Paper 0549, Institute of Social and Economic Research, Osaka University.
- Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
- Massimiliano Caporin & Michael McAleer, 2008. "Scalar BEKK and indirect DCC," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(6), pages 537-549.
- Jeantheau, Thierry, 1998. "Strong Consistency Of Estimators For Multivariate Arch Models," Econometric Theory, Cambridge University Press, vol. 14(01), pages 70-86, February.
- Billio, Monica & Caporin, Massimiliano, 2009. "A generalized Dynamic Conditional Correlation model for portfolio risk evaluation," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(8), pages 2566-2578.
- Monica Billio & Massimiliano Caporin, 2006. "A generalized Dynamic Conditional Correlation Model for Portfolio Risk Evaluation," Working Papers 2006_53, Department of Economics, University of Venice "Ca' Foscari".
- Robert Engle & Neil Shephard & Kevin Shepphard, 2008. "Fitting vast dimensional time-varying covariance models," OFRC Working Papers Series 2008fe30, Oxford Financial Research Centre.
- Neil Shephard & Kevin Sheppard & Robert F. Engle, 2008. "Fitting vast dimensional time-varying covariance models," Economics Series Working Papers 403, University of Oxford, Department of Economics.
- Asai, M. & Caporin, M., 2009. "Block Structure Multivariate Stochastic Volatility Models," Econometric Institute Research Papers EI 2009-51, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Manabu Asai & Massimiliano Caporin & Michael McAleer, 2010. "Block Structure Multivariate Stochastic Volatility Models," Working Papers in Economics 10/24, University of Canterbury, Department of Economics and Finance.
- Manabu Asai & Massimiliano Caporin & Michael McAleer, 2009. "Block Structure Multivariate Stochastic Volatility Models," CIRJE F-Series CIRJE-F-699, CIRJE, Faculty of Economics, University of Tokyo.
- Massimiliano Caporin & Paolo Paruolo, 2009. "Structured Multivariate Volatility Models," "Marco Fanno" Working Papers 0091, Dipartimento di Scienze Economiche "Marco Fanno".
- Comte, F. & Lieberman, O., 2003. "Asymptotic theory for multivariate GARCH processes," Journal of Multivariate Analysis, Elsevier, vol. 84(1), pages 61-84, January.
- Matteo Bonato & Massimiliano Caporin & Angelo Ranaldo, 2009. "Forecasting realized (co)variances with a block structure Wishart autoregressive model," Working Papers 2009-03, Swiss National Bank.
- Bonato, Matteo & Caporin, Massimiliano & Ranaldo, Angelo, 2012. "Forecasting Realized (Co)Variances with a Bloc Structure Wishart Autoregressive Model," Working Papers on Finance 1211, University of St. Gallen, School of Finance.
- Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
- Monica Billio & Massimiliano Caporin & Michele Gobbo, 2006. "Flexible Dynamic Conditional Correlation multivariate GARCH models for asset allocation," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(2), pages 123-130, March.
- McAleer, Michael & Chan, Felix & Hoti, Suhejla & Lieberman, Offer, 2008. "Generalized Autoregressive Conditional Correlation," Econometric Theory, Cambridge University Press, vol. 24(06), pages 1554-1583, December. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ucm:doicae:0904. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Águeda González Abad)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.