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Adjusting Correlation Matrices

Author

Listed:
  • Ángel León

    (Universidad de Alicante)

  • Josep Enric Peris Ferrando

    (Universidad de Alicante)

  • Begoña Subiza

    (Universidad de Alicante)

  • José Angel Silva

    (Universidad de Alicante)

Abstract

The article proposes 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 we do not wish to alter but they change in order to obtain a consistent Finger correlation matrix.

Suggested Citation

  • Ángel León & Josep Enric Peris Ferrando & Begoña Subiza & José Angel Silva, 2000. "Adjusting Correlation Matrices," Working Papers. Serie AD 2000-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2000-24
    as

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2000-24.pdf
    File Function: Fisrt version / Primera version, 2000
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