Publication: Theoretical and Empirical Differences Between Diagonal and Full BEKK for Risk Management
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Advisors (or tutors)
Facultad de CC Económicas y Empresariales. Instituto Complutense de Análisis Económico (ICAE)
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  show that univariate GARCH is not a special case of multivariate GARCH, specifically, 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 suffer from these limitations, and hence provides a suitable benchmark. We use simulated financial returns series to contrast estimates of the conditional variances 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.
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