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Random Correlation Matrix and De-Noising

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Author Info

  • Ken-ichi Mitsui

    () (Doctor Candidate of Osaka University)

  • Yoshio Tabata

    () (Graduate School of Business Administration, Nanzan Univeristy)

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    Abstract

    In Finance, the modeling of a correlation matrix is one of the important problems. In particular, the correlation matrix obtained from market data has the noise. Here we apply the de-noising processing based on the wavelet analysis to the noisy correlation matrix, which is generated by a parametric function with random parameters. First of all, we show that two properties, i.e. symmetry and ones of all diagonal elements, of the correlation matrix preserve via the de-noising processing and the efficiency of the de-nosing processing by numerical experiments. We propose that the de-noising processing is one of the effective methods in order to reduce the noise in the noisy correlation matrix.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0626.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 06-26.

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    Length: 25 pages
    Date of creation: Sep 2006
    Date of revision:
    Handle: RePEc:osk:wpaper:0626

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Related research

    Keywords: correlation matrix; calibration; rank reduction; de-noising; wavelet analysis;

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    1. Frank de Jong & Joost Driessen & Antoon Pelsser, 2004. "On the Information in the Interest Rate Term Structure and Option Prices," Review of Derivatives Research, Springer, vol. 7(2), pages 99-127, 08.
    2. Massimo Morini & Nick Webber, 2006. "An EZI Method to Reduce the Rank of a Correlation Matrix in Financial Modelling," Applied Mathematical Finance, Taylor and Francis Journals, vol. 13(4), pages 309-331.
    3. Grubišić, I. & Pietersz, R., 2005. "Efficient Rank Reduction of Correlation Matrices," Research Paper ERS-2005-009-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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