@article {Numpacharoen67, author = {Kawee Numpacharoen}, title = {Weighted Average Correlation Matrices Method for Correlation Stress Testing and Sensitivity Analysis}, volume = {21}, number = {2}, pages = {67--74}, year = {2013}, doi = {10.3905/jod.2013.21.2.067}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Stress testing entails pushing risk parameters toward more extreme levels and exploring the impact on portfolio value. But it is not trivial to perturb a correlation matrix while maintaining its necessary properties. All entries on the diagonal must be 1.0; all off-diagonal entries must lie in the interval [{\textendash}1.0,1.0]; and the matrix has to be symmetric and positive (semi) definite. In this article, Numpacharoen presents a remarkably simple approach for modifying a correlation matrix that maintains its required properties. He proves that the weighted average of two proper correlation matrices will also be a proper correlation matrix, which points the way toward easy procedures for stress testing all, or a subset, of the correlations among a set of securities.TOPICS: Risk management, quantitative methods}, issn = {1074-1240}, URL = {https://jod.pm-research.com/content/21/2/67}, eprint = {https://jod.pm-research.com/content/21/2/67.full.pdf}, journal = {The Journal of Derivatives} }