Finding a Valid FX Covariance Matrix in the BS World
AbstractA number of methods has already been proposed for creating a valid correlation matrix in finance. However, such methods do not normally take into account additional restrictions on matrix elements imposed by specific non-arbitrage conditions in some markets, e.g. foreign exchange (FX). I suggest that taking those restrictions, known as triangular relationships, into account can lead to a more efficient method of correction of invalid correlation matrices, at least in FX markets. This paper outlines the steps of the new method.
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Bibliographic InfoPaper provided by European University at St. Petersburg, Department of Economics in its series EUSP Deparment of Economics Working Paper Series with number Ec-03/12.
Length: 28 pages
Date of creation: 25 Jun 2012
Date of revision:
correlation matrix; eigenvalue; foreign exchange; triangular relationship; quantitative finance;
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