Mathematical Software for the Nearest Correlation Matrix

Narrative

Correlation matrices play a key role in financial modelling, but their empirical construction (based on the actual statistical data) may lead to negative variances, which can lead to complete failure of a model. Our research has resulted in algorithms for efficiently computing the unique nearest correlation matrix (NCM) that does not yield negative variances. The most direct impact is to Numerical Algorithms Group (NAG) Ltd, whose library sales and renewals have been increased by an estimated £250k following the inclusion of our NCM codes. Further impact is to NAG clients, including the Tier 1 Investment Banks, with at least six of the top ten [e.g., Credit Suisse and Morgan Stanley] known to be using the new NAG nearest correlation matrix codes, leading to improved reliability of their financial models.

Impact date	2014
Category of impact	Technological, Economic
Impact level	Benefit