Adjusting correlation matrices

  1. León Valle, Angel
  2. Peris Ferrando, Josep E.
  3. Silva, José A.
  4. Subiza Martínez, Begoña
Journal:
Working papers = Documentos de trabajo: Serie AD

Year of publication: 2000

Issue: 24

Type: Working paper

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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.

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