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Risk evaluation with enhanced covariance matrix

Author

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  • Urbanowicz, Krzysztof
  • Richmond, Peter
  • Hołyst, Janusz A.

Abstract

We propose a route for the evaluation of risk based on a transformation of the covariance matrix. The approach uses a ‘potential’ or ‘objective’ function. This allows us to rescale data from different assets (or sources) such that each data set then has similar statistical properties in terms of their probability distributions. The method is tested using historical data from both the New York and Warsaw stock exchanges.

Suggested Citation

  • Urbanowicz, Krzysztof & Richmond, Peter & Hołyst, Janusz A., 2007. "Risk evaluation with enhanced covariance matrix," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 384(2), pages 468-474.
    • Handle: RePEc:eee:phsmap:v:384:y:2007:i:2:p:468-474
    DOI: 10.1016/j.physa.2007.05.034
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    Cited by:

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    2. Bertram, William K., 2008. "Measuring time dependent volatility and cross-sectional correlation in Australian equity returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(13), pages 3183-3191.

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