Efficient Rank Reduction of Correlation Matrices

Igor Grubisic and Raoul Pietersz ()

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: Geometric optimisation algorithms are developed that efficiently find the nearest low-rank correlation matrix. We show, in numerical tests, that our methods compare favourably to the existing methods in the literature. The connection with the Lagrange multiplier method is established, along with an identification of whether a local minimum is a global minimum. An additional benefit of the geometric approach is that any weighted norm can be applied. The problem of finding the nearest low-rank correlation matrix occurs as part of the calibration of multi-factor interest rate market models to correlation.

Keywords: LIBOR market model; Rank; correlation matrix; geometric optimisation (search for similar items in EconPapers)
JEL-codes: C61 E43 G13 G3 M (search for similar items in EconPapers)
Date: 2005-04-03
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Citations: View citations in EconPapers (6)

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