Random Correlation Matrix and De-Noising
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.
|Date of creation:||Sep 2006|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econ.osaka-u.ac.jp/|
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- Grubisic, I. & Pietersz, R., 2005.
"Efficient Rank Reduction of Correlation Matrices,"
ERIM Report Series Research in Management
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 University Rotterdam.
- 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.
- Massimo Morini & Nick Webber, 2006. "An EZI Method to Reduce the Rank of a Correlation Matrix in Financial Modelling," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(4), pages 309-331.
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