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Finding a Valid FX Covariance Matrix in the BS World

Author

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  • Maxim Bouev

Abstract

A 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.

Suggested Citation

  • Maxim Bouev, 2012. "Finding a Valid FX Covariance Matrix in the BS World," EUSP Department of Economics Working Paper Series 2012/03, European University at St. Petersburg, Department of Economics.
    • Handle: RePEc:eus:wpaper:ec2012_03
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    File URL: https://eusp.org/sites/default/files/archive/ec_dep/wp/ec-03_12.pdf
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    Citations

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    Cited by:

    1. Maxim Bouev & Ilia Manaev & Aleksei Minabutdinov, 2013. "Finding the Nearest Valid Covariance Matrix: An FX Market Case," EUSP Department of Economics Working Paper Series Ec-07/13, European University at St. Petersburg, Department of Economics.
    2. Aleksei Minabutdinov & Ilia Manaev & Maxim Bouev, 2014. "Finding The Nearest Valid Covariance Matrix: A Fx Market Case," HSE Working papers WP BRP 32/FE/2014, National Research University Higher School of Economics.

    More about this item

    Keywords

    correlation matrix; eigenvalue; foreign exchange; triangular relationship; quantitative finance;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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