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A note on adjusting correlation matrices

Author

Listed:
  • A. Leon
  • J. E. Peris
  • J. Silva
  • B. Subiza

Abstract

A new algorithm for adjusting correlation matrices and for comparison with Finger's algorithm, which is used to compute Value-at-Risk in RiskMetrics for stress test scenarios. The solution proposed by the new methodology is always better than Finger's approach in the sense that it alters as little as possible those correlations that one would wish not to alter, but they change in order to obtain a consistent Finger correlation matrix.

Suggested Citation

  • A. Leon & J. E. Peris & J. Silva & B. Subiza, 2002. "A note on adjusting correlation matrices," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(1), pages 61-67.
    • Handle: RePEc:taf:apmtfi:v:9:y:2002:i:1:p:61-67
    DOI: 10.1080/13504860210136721
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    Cited by:

    1. Yu, Philip L.H. & Li, W.K. & Ng, F.C., 2014. "Formulating hypothetical scenarios in correlation stress testing via a Bayesian framework," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 17-33.

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