Nearest Neighbor Technique for a Positive Definite Correlation Matrix in Advanced Stressed VAR

7 Pages Posted: 13 Jul 2016 Last revised: 22 Nov 2016

Date Written: July 11, 2016

Abstract

We present a new technique for obtaining a positive definite (PD) correlation matrix from a stressed target matrix within the context of Advanced Stressed Value at Risk, (cf. Dash ). The technique uses the spherical decomposition and a “nearest neighbor” technique. The advantage is that control over the scenario specified by the risk manager for the target matrix is achieved in that a maximal number of correlations specified by the target matrix scenario is maintained.

Keywords: Positive Definite, Stressed Target Matrix, Advanced Stressed Value at Risk, Spherical Decomposition, Nearest Neighbor, Risk Manager

JEL Classification: C14, C63, F65, G01, G1

Suggested Citation

Dash, Jan and Yang, Xipei, Nearest Neighbor Technique for a Positive Definite Correlation Matrix in Advanced Stressed VAR (July 11, 2016). Available at SSRN: https://ssrn.com/abstract=2808122 or http://dx.doi.org/10.2139/ssrn.2808122

Jan Dash (Contact Author)

Bloomberg LP ( email )

731 Lexington Ave
New York, NY 10022
United States

Xipei Yang

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

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