The most simple methodology to create a valid correlation matrix for risk management and option pricing purposes

Abstract

We present a methodology for obtaining a valid correlation matrix from an invalid one for financial applications. In contrast to other approaches, the methodology described only requires the use of elementary matrix algebra and a simple randomization procedure.

Acknowledgments

This article contains the current opinions of the authors and not necessarily those of PIMCO (Pacific Investment Management Company LLC). These opinions are subject to change without notice.