Completing Correlation Matrices of Arbitrary Order by Differential Evolution Method of Global Optimization: A Fortran Program

17 Pages Posted: 8 Mar 2007 Last revised: 7 Jun 2011

Date Written: March 5, 2007

Abstract

Correlation matrices have many applications, particularly in marketing and financial economics. The need to forecast demand for a group of products in order to realize savings by properly managing inventories requires the use of correlation matrices.

In many cases, due to paucity of data/information or dynamic nature of the problem at hand, it is not possible to obtain a complete correlation matrix. Some elements of the matrix are unknown. Several methods exist that obtain valid complete correlation matrices from incomplete correlation matrices. In view of non-unique solutions admissible to the problem of completing the correlation matrix, some authors have suggested numerical methods that provide ranges to different unknown elements. However, they are limited to very small matrices up to order 4.

Our objective in this paper is to suggest a method (and provide a Fortran program) that completes a given incomplete correlation matrix of an arbitrary order. The method proposed here has an advantage over other algorithms due to its ability to present a scenario of valid correlation matrices that might be obtained from a given incomplete matrix of an arbitrary order. The analyst may choose some particular matrices, most suitable to his purpose, from among those output matrices. Further, unlike other methods, it has no restriction on the distribution of holes over the entire matrix, nor the analyst has to interactively feed elements of the matrix sequentially, which might be quite inconvenient for larger matrices. It is flexible and by merely choosing larger population size one might obtain a more exhaustive scenario of valid matrices. Moreover, the Differential Evolution algorithm is easily amenable to parallelization.

Keywords: Incomplete, complete, correlation matrix, valid, semi-definite, eigenvalues, Differential Evolution, global optimization, computer program, Fortran, financial economics, arbitrary order

JEL Classification: C15, C63, C87, C88

Suggested Citation

Mishra, Sudhanshu K., Completing Correlation Matrices of Arbitrary Order by Differential Evolution Method of Global Optimization: A Fortran Program (March 5, 2007). Available at SSRN: https://ssrn.com/abstract=968373 or http://dx.doi.org/10.2139/ssrn.968373

Sudhanshu K. Mishra (Contact Author)

North-Eastern Hill University (NEHU) ( email )

NEHU Campus
Shillong, 793022
India
03642550102 (Phone)

HOME PAGE: http://www.nehu-economics.info

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