Finding a Valid FX Covariance Matrix in the BS World

European University at St. Petersburg Department of Economics Working Paper No. EC-03/12

28 Pages Posted: 16 Dec 2012 Last revised: 6 Jan 2013

See all articles by Maxim Bouev

Maxim Bouev

New Economic School (NES); European University at St.Petersburg

Date Written: June 1, 2012

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.

Keywords: correlation matrix, eigenvalue, foreign exchange, triangular relationship, quantitative finance

JEL Classification: C63

Suggested Citation

Bouev, Maxim, Finding a Valid FX Covariance Matrix in the BS World (June 1, 2012). European University at St. Petersburg Department of Economics Working Paper No. EC-03/12. Available at SSRN: https://ssrn.com/abstract=2189941 or http://dx.doi.org/10.2139/ssrn.2189941

Maxim Bouev (Contact Author)

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

European University at St.Petersburg ( email )

3 Gagarinskaya Street
St. Petersburg, 191187
Russia

Register to save articles to
your library

Register

Paper statistics

Downloads
60
Abstract Views
448
rank
354,633
PlumX Metrics