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
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
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