Volume 54, Number 2, March-April 2020
|Page(s)||361 - 371|
|Published online||12 February 2020|
A new methodology to create valid time-dependent correlation matrices via isospectral flows
Lehrstuhl für Angewandte Mathematik und Numerische Analysis, Fakultät für Mathematik und Naturwissenschaften, Bergische Universität Wuppertal, Gaußstr. 20, 42119 Wuppertal, Germany
2 IEK-8, Forschungszentrum Jülich, Wilhelm-Johnen-Straße, 52428 Jülich, Germany
3 Rhenish Institute for Environmental Research at University of Cologne, Aachener Straße 209, 50931 Cologne, Germany
* Corresponding author: firstname.lastname@example.org
Accepted: 29 August 2019
In many areas of finance and of risk management it is interesting to know how to specify time-dependent correlation matrices. In this work we propose a new methodology to create valid time-dependent instantaneous correlation matrices, which we called correlation flows. In our methodology one needs only an initial correlation matrix to create these correlation flows based on isospectral flows. The tendency of the time-dependent matrices can be controlled by requirements. An application example is presented to illustrate our methodology.
Mathematics Subject Classification: 93A30 / 62H20 / 62P05
Key words: Time-dependent correlation matrix / isospectral flow / matrix differential equation
© EDP Sciences, SMAI 2020
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