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

Massimiliano Caporin and Michael McAleer

No CARF-F-156, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: 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.

Pages: 30 pages
Date: 2009-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (76)

Downloads: (external link)
https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/161.pdf (application/pdf)

Related works:
Working Paper: Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models (2009)
Working Paper: Do We Really Need Both BEKK and DCC? A Tale of Two Covariance Models (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf156

Access Statistics for this paper

More papers in CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by ().