DoubleDecay: Double-Decay Covariance Matrix

In ffp: Fully Flexible Probabilities for Stress Testing and Portfolio Construction

Double-Decay Covariance Matrix

Description

This function computes the covariance matrix using two different decay factors.

Usage

DoubleDecay(x, decay_low, decay_high)

Arguments

x	A set of relevant risk drivers.
decay_low	A numeric value with the low decay (long half-life).
decay_high	A numeric value with the high decay (short half-life).

Details

A common practice is to estimate the covariance of the risk drivers using a high decay (short half-life) for the volatilities and a low decay (long half-life) for the correlations.

Value

A list with the posterior mean ans sigma.

ffp documentation built on Sept. 29, 2022, 5:10 p.m.