Correlated Monte Carlo Simulation using Cholesky Decomposition

20 Pages Posted: 4 May 2022 Last revised: 13 May 2022

See all articles by Nicholas Burgess

Nicholas Burgess

University of Oxford - Said Business School

Date Written: March 25, 2022

Abstract

In this paper we outline the steps necessary to perform Monte Carlo simulation with multiple correlated assets using Cholesky Decomposition. First we illustrate how to perform Monte Carlo simulation on a single asset. Secondly we look at Monte Carlo simulation for multiple assets that are correlated. Thirdly we discuss how to introduce asset correlation and finally we outline how to use Cholesky Decomposition to generate correlated random variables for Monte Carlo simulation including how to compute the correlation lower diagonal matrix.

Keywords: Multi-Dimensional, Monte Carlo, Simulation, Correlation, Brownian Motion, Ito's Lemma, Cholesky Decomposition, Correlated Random Variables

JEL Classification: C15, C22, C53, C73, F17, G12, G15

Suggested Citation

Burgess, Nicholas, Correlated Monte Carlo Simulation using Cholesky Decomposition (March 25, 2022). Available at SSRN: https://ssrn.com/abstract=4066115

Nicholas Burgess (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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