publication . Preprint . 2006

Random Correlation Matrix and De-Noising

Ken-ichi Mitsui; Yoshio Tabata;
Open Access
  • Published: 01 Sep 2006
Abstract
In Finance, the modeling of a correlation matrix is one of the important problems. In particular, the correlation matrix obtained from market data has the noise. Here we apply the de-noising processing based on the wavelet analysis to the noisy correlation matrix, which is generated by a parametric function with random parameters. First of all, we show that two properties, i.e. symmetry and ones of all diagonal elements, of the correlation matrix preserve via the de-noising processing and the efficiency of the de-nosing processing by numerical experiments. We propose that the de-noising processing is one of the effective methods in order to reduce the noise in t...
Subjects
free text keywords: correlation matrix, calibration, rank reduction, de-noising, wavelet analysis, jel:C51, jel:C61, jel:C63, jel:G32

Brigo, D. A note on correlation and rank reduction. Working paper. available at www.damianobrigo.it, 2002.

Dahmen, W., Kurdila, A. and Oswald, P. (1997) Multiscale Wavelet Methods for Partial Differential Equations, (Academic Press). [OpenAIRE]

De Jong, F., Driessen, J. and Pelsser, A. (2004) On the Information in the Interest Rate Term Structure and Option Prices, Review of Derivatives Research 7(2), pp. 99-127.

Donoho, D.L. (1995) De-Noising via Soft Thresholding, IEEE Trans. Inform. Theory 41, pp. 613-627.

Donoho, D. L. (1993) Progress in wavelet analysis and WVD: a ten minute tour, in Progress in wavelet analysis and applications, Y. Meyer, S. Roques, 109-128. Frontieres Ed.

Donoho, D.L. and Johnstone, I.M. (1994) Ideal spatial adaptation by wavelet shrinkage, Biometrika 81, pp. 425-455. [OpenAIRE]

Grubiˇsi´c, I. and Pietersz, R. Efficient Rank Reduction of Correlation Matrices. preprint, Utrecht University, 2005.

London, J. (2004) Modeling Derivatives in C++, (John Wiley and Sons Inc.).

M. Morini and N. Webber, An EZI method to reduce the rank of a correlation matrix in financial modelling, To appear in Applied Mathematical Finance, 2006. [OpenAIRE]

Press, W. H., Flannery, B. P., Teukolsky S. A. and Vetterling, W. T. (1992) Numerical Recipes in C: The Art of Scientific Computing, (Cambridge University Press).

Rebonato, R. (1999) On the simultaneous calibration of multi-factor log-normal interestrate models to Black volatilities and to the correlation matrix, Journal of Computational Finance 2(4), pp. 5-27.

Powered by OpenAIRE Open Research Graph
Any information missing or wrong?Report an Issue