Testing large dimensional correlation
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Date
2007-05-25T12:23:32Z
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Abstract
This paper introduces a test for zero correlation in situations where
the correlation matrix is large compared to the sample size. The test
statistic is the sum of the squared correlation coe±cients in the sample.
We derive its limiting null distribution as the number of variables as
well as the sample size converge to infinity. A Monte Carlo simulation
finds both size and power for finite samples to be suitable. We apply
the test to the vector of default rates, a risk factor in portfolio credit
risk, in different sectors of the German economy.
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Keywords
N-p- asymptotics, Portfolio credit risk, Testing correlation