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BLOBY
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Joined: May 17th, 2004, 5:07 am

Correlation linearization

October 23rd, 2012, 8:11 am

Hi, I got to set a correlation constraint in my optimizer for an equity portfolio generating, but correlation is not linear and even not convex. How would you linearize correlation in order to be able to set it as a constraint ? Thx a lot.
 
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Alan
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Correlation linearization

October 23rd, 2012, 1:17 pm

The best solution is to get a better optimizer -- one that handles non-linear constrained problems, say Mathematica,Absent that, to get a good response, I think you need to spell out:1. What exactly are the capabilities of your optimizer?2. What exactly is the (ideal) correlation constraint you want to approximate?
 
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Traden4Alpha
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Joined: September 20th, 2002, 8:30 pm

Correlation linearization

October 23rd, 2012, 1:33 pm

To add to Alan's point #2 is the issue of coupling between correlations in a correlation matrix. One cannot constrain single values in the matrix without running the risk of creating an invalid correlation matrix.
 
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BLOBY
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Joined: May 17th, 2004, 5:07 am

Correlation linearization

October 29th, 2012, 1:59 pm

Alan, my optimizer is Matlab, and I just try to minimize my equity portfolio's variance under a few sectors, liquidity constraints ... and particularly a correlation (between my output portolio and an equity benchmark) constraint...Thanks again.
 
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Alan
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Correlation linearization

October 29th, 2012, 5:17 pm

See my previous post:1. ?2. ?
Last edited by Alan on October 28th, 2012, 11:00 pm, edited 1 time in total.
 
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BLOBY
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Posts: 113
Joined: May 17th, 2004, 5:07 am

Correlation linearization

October 30th, 2012, 5:37 pm

1. What exactly are the capabilities of your optimizer?=> I don't know, it's just the optimization toolbox of Matlab (fmincon function)2. What exactly is the (ideal) correlation constraint you want to approximate? => I just wanna constraint the correlation between my output portfolio return (Nav) and equity benchmark (say S&P500) return. For example, correlation between both can never go below 80%.Hope it helps.
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