Nearest Neighbor Technique for a Positive Definite Correlation Matrix in Advanced Stressed VAR

We present a new technique for obtaining a positive definite (PD) correlation matrix from a stressed target matrix within the context of Advanced Stressed Value at Risk, (cf. Dash ). The technique uses the spherical decomposition and a “nearest neighbor” technique. The advantage is that control over the scenario specified by the risk manager for the target matrix is achieved in that a maximal number of correlations specified by the target matrix scenario is maintained