A note on adjusting correlation matrices

Ángel León · Josep E. Peris · Jailson Barros Da Silva · Begoña Subiza

15 citations0/0 files storedApplied Mathematical Finance

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Financial Risk and Volatility Modeling Matrix Theory and Algorithms Risk and Portfolio Optimization

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.

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