Hybrid correlation matrices

Hybrid correlation matrices

sine wave

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Monte Carlo simulations for pricing are ubiquitous in finance, particularly for credit valuation adjustments, which are carried out at portfolio level. Ideally in such a situation one uses market-implied data. However, with diversified portfolios this is often impossible due to a lack of tradable instruments. The only other source of correlation data is historical but the result of mixing historical and implied correlations does

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