Upper and Lower Bounds for Entries in a Valid Correlation Matrix

10 Pages Posted: 8 Jul 2021

Date Written: June 23, 2021

Abstract

We discuss the problems associated with changing individual correlation values in a valid correlation matrix and outline a solution for calculating upper and lower bounds within which correlations can be modified, such that the resulting correlation matrix is still valid. We illustrate two particular applications of our solution: Sensitivity analysis of portfolio risk to an individual correlation coefficient and randomization of correlation coefficients in particular blocks of correlation matrix.

Keywords: correlation, dependency, correlation matrix, positive semidefinite, stress testing, scenario analysis

JEL Classification: G11,C02,C15

Suggested Citation

Steiner, Andreas, Upper and Lower Bounds for Entries in a Valid Correlation Matrix (June 23, 2021). Available at SSRN: https://ssrn.com/abstract=3872469 or http://dx.doi.org/10.2139/ssrn.3872469

Andreas Steiner (Contact Author)

Andreas Steiner Consulting GmbH ( email )

Walderstrasse 43c
Hinwil, 8340
Switzerland

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