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Boundaries of Correlation Adjustment with Applications to Financial Risk Management

Author

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  • Kawee Numpacharoen
  • Kornkanok Bunwong

Abstract

In recent years, stress testing has become a regulatory requirement for risk assessment in financial institutions. To perform stress testing in multi-asset case, adjusting the correlation matrix to an extreme level is an important process. With a larger matrix, it is more difficult to choose the right correlation coefficients such that the newly adjusted correlation matrix is still valid. In this article, we present a systematic way to obtain the boundaries of a correlation matrix for both single stress and multiple stress cases, which can help determine how much the correlation should be adjusted in the first place.

Suggested Citation

  • Kawee Numpacharoen & Kornkanok Bunwong, 2013. "Boundaries of Correlation Adjustment with Applications to Financial Risk Management," Applied Mathematical Finance, Taylor & Francis Journals, vol. 20(4), pages 403-414, September.
    • Handle: RePEc:taf:apmtfi:v:20:y:2013:i:4:p:403-414
    DOI: 10.1080/1350486X.2012.723517
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    Cited by:

    1. Soyeon Ahn & John M. Abbamonte, 2020. "A new approach for handling missing correlation values for meta‐analytic structural equation modeling: Corboundary R package," Campbell Systematic Reviews, John Wiley & Sons, vol. 16(1), March.

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